Defence giant BAE Systems (GB:BA) is a company which could benefit from current global instability – in particular the Russia-Ukraine conflict – with a huge surge in the demand for war equipment.
Don't Miss Our Christmas Offers:
- Discover the latest stocks recommended by top Wall Street analysts, all in one place with Analyst Top Stocks
- Make smarter investments with weekly expert stock picks from the Smart Investor Newsletter
Could it be time to invest?
The company showed a strong operational performance in the first half of 2022. The company posted sales of £10.58 billion during the six-month period that ended on June 30, 2022. Order intake jumped by 70% to £17.9 billion and revenues increased by 4.3% to £9.7 billion.
But the company is facing challenges on the supply side due to rising costs, higher delivery lead times, and labour shortages. As a result, operating profit was down by 21.1% to £1,028 million.
The stock performance
The company’s stock gained tremendous traction after the war started in February 2022. Shares have been trading up by 41% this year so far, beating the FTSE 100 index, which is down by 2.7%.
What does BAE Systems do?
BAE Systems is a leading manufacturer and seller of defence products used in air, land, and marine sectors.
The company also provides a full range of support and engineering services. The main markets for BAE are the U.S., the UK, Saudi Arabia, and Australia.
Further upside
The company is strategically placed to benefit from the increasing defence budgets globally with its diverse range of products. Defence spending outlook is positive in two of its biggest markets, the U.S. and the UK, supporting the top-line growth of the company.
The company generates a lot of recurring income through long-term contracts, which provides an advantage to offset the current headwinds.
In the U.S., the company has a good contract pipeline, including an 18-year contract for ballistic missiles and another five-year contract for the Army Defence Supercomputing Resource Center.
The government’s defence spending has been increased to $773 in 2023, which will benefit the company.
Liz Truss, the new Prime Minister in the UK, has also announced she will increase defence spending to 3% of GDP by 2030. This creates a huge growth opportunity for the company as the UK government is one of its major customers.
BAE Systems’ dividends
Considering its strong operations and even stronger outlook, it rewarded its shareholders with dividend growth and buybacks.
The company announced a 5% increase in the interim dividend to 10.4p per share. It also launched a three-year share buyback program for a value of up to £1.5 billion.
Is BAE Systems stock a buy?
According to TipRanks’ analyst rating consensus, BAE stock has a Moderate Buy rating. It is based on four Buy and two Hold recommendations.
The BA target price is 1,018.7p, which represents a 33% change in the price from the current level.
Conclusion
Being a market leader, the company has a competitive advantage and is known as a trusted supplier. The company expects the strong order flow to continue in the second half of the year, enhancing its overall growth outlook.
With governments all over the world increasing their defence spending combined with BAE’s solid contracts and a range of unique products, the stock is worth investing in.
