BAE Systems Nabs $3.2B UK Armed Forces Contract; Street Is Bullish

BAE Systems has secured a £2.4 billion ($3.20 billion) contract to supply munitions and engineering support to the UK Ministry of Defense.

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The 15-year contract will enable BAE (BAESF) to invest £70 million in the refurbishment and upgrading of manufacturing lines, with 75% of this value being invested by 2026. In addition, the UK defense company plans to spend up to £350 million with UK-based companies on raw materials and machine components.

BAE expects that the contract will also help sustain another 4,000 jobs across the UK.

“This contract secures the future of a highly technical and critical industry which supports thousands of manufacturing jobs in several areas throughout the UK,” BAE CEO Charles Woodburn said. “By investing in new technology and skills to further develop our expertise, we can continue to deliver essential sovereign capability to the Armed Forces at competitive prices.”

The contract, which is due to commence in January 2023, will replace the current contract, which started in 2008 and expires at the end of 2022. BAE Systems directly employs 1,260 people who are involved in either munitions manufacturing or testing, and evaluation at five sites across the UK.

Shares of BAE have seen some recovery recently. The stock is up 26% over the past month but is still down 9% so far this year. However, analysts have a bullish outlook on the stock. The Strong Buy consensus shows 5 Buy ratings versus only 1 Hold rating. That’s with an average price target of $7.92, which indicates that 18% upside potential lies ahead in the coming 12 months.

Meanwhile, Jefferies analyst Sandy Morris recently upgraded the stock to Buy from Hold with a $7.86 price target as the analyst views BAE as “strongly placed” to weather lower US defence budgets.

Morris added that the company has fundamental backing from free cash flow yield as well. (See BAE stock analysis on TipRanks).