Image source: Getty Images
Almost a month goes by without major new orders being announced to support the base BAE Systems' (LSE: BA.) share price, in my opinion.
Mandulo was no different. On the 26thth received a $177.8m contract from the US Navy to maintain and upgrade its destroyer USS Halsey.
13th saw the UK Ministry of Defense award it a £60m contract to develop the Royal Navy's Sting Ray lightweight torpedo.
And the US Army concluded a $440m contract with 12th to produce more Bradley fighting vehicles.
Prior to this, H1 saw an increase of £1.6bn in its order book from H2 2023, to £59.6bn. Its order backlog jumped by £4.3bn in the same six-month period, to £74.1bn. This increase saw its sales rise by 13%, to £13.4bn.
What is the outlook for the defense sector?
None of these numbers surprise me. BAE Systems is the largest defense contractor in Europe and the seventh largest in the world. And sadly, I think the global security situation hasn't looked this dangerous in decades.
The stock has fallen since September 17 on rumors that Ukraine's allies are talking about a negotiated ceasefire. This could be bad news for all of us, depending on the conditions.
However, even if it is true, it will not reduce the ongoing threat to Europe from Russia, in my opinion – or NATO, it seems. Its members have committed to increasing their annual defense spending to 2%+ of gross domestic product.
And it won't reduce the chances of unrest in the Middle East if Israel just enters Lebanon. Nor will it reduce the potential for a major superpower conflict in Asia, centered on Taiwan.
What does the firm's growth look like from here?
In its H1 2024 results, BAE increased its sales guidance by 2% for this year – to 12%-14% (from 10%-12%). It increased its profit before assuming interest and taxes by 1% – to 12%-14% (from 11%-13%).
It also increased its free cash flow forecasts by £200m – to more than £1.5bn. This would give a total free cash flow delivered over the three years to the end of 2024 of more than £6.0bn. This in itself can be a major driver of growth.
Earnings forecasts are subject to risk, of course, and in the case of BAE Systems, another failure of one of its products. This can be very expensive to fix and can damage its reputation.
That said, as it stands, analysts predict that earnings will grow by 7.3% each year until the end of 2026.
Are stocks cheap?
I already own the stock from the lowest price levels, so I'm happy with that position.
However, if I didn't have them, I would see them as an irresistible buying opportunity at the current price.
On the key price-to-earnings (P/E) ratio of the stock, BAE Systems trades at just 20.2. This is relatively cheap compared to the peer's P/E ratio of 44.4.
In fact, a discounted cash flow analysis shows that the shares are undervalued at £12.29. So I believe a fair price would be £16.39.
They may be higher or lower than that, depending on market conditions. But it emphasizes to me how much money they seem to be right now.
Source link
