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BAE Systems (LSE: BA.) shares outperformed the range FTSE 100 in recent years. But the drivers of this success – wars, growing international relations, and rising defense spending – are far from celebrated.
So far this year, BAE’s stock is up 21%, making its five-year return 135%. Almost all of that profit has come since Russia invaded Ukraine in February 2022.
But with Donald Trump back in the White House, promising to end all ongoing disputes, I’ve been wondering what to do with my shares in BAE. Sell, buy more, or hold on? Here’s my take.
It’s on its way
Yesterday (12 November), the defense giant gave a brief but strong trading update. It said it had secured £25bn of orders in the year to date, with several notable contracts won in the second half. This includes the provision of various weapons and combat vehicles.
The company reiterated its full-year guidance for sales and operating profit growth of 12%-14%, with free cash flow exceeding £1.5bn. So everything is going as planned.
It also said the US$4.4bn acquisition of US-based Ball Aerospace is progressing well. Renamed Space & Mission Systems (SMS), the division gives BAE a stake in the high-growth space sector. It also deepens the company’s relationship with NASA.
The SMS says “to bring the margins to the team“, says the company, and sees annual sales there growing by 10% in the medium term. This should mean that sales in this unit increase to $4bn in 2030, from around $2bn in 2022.
Trump’s wildcard
Will the next US president be good or bad for BAE’s share price? I’m a little sad.
On the other hand, he demanded that NATO members increase their defense spending, most of which will already reach 2%+ of GDP spending this year. The UK government has committed to increasing defense spending to 2.5% of GDP in the future. So this should lead to an increase in demand for the company’s products.
Meanwhile, Trump has promised to increase the military. The US is BAE’s biggest market, so this is another good thing.
On the other hand, Trump is also unpredictable and threatens to cut off all military aid to Ukraine. He is also planning significant tariffs on US imports, which could spark wider trade wars. So there may be supply chain risks for major manufacturers like BAE.
My decision
The stock is up 64% since I first invested in 2022. But I would hope to gain some of the share price to justify keeping the stock in my portfolio.
What are the chances of that? However, analysts see strong growth ahead, driven by BAE’s large order book. Revenue is expected to rise to more than £32bn in 2026, up from £23bn in 2023. Shares are forecast to grow 7%-10%.
In addition, the company said yesterday (November 12) that its portfolio remains “it goes well with the important things” of US defense strategy. And it continues “see growth opportunities in this market in the medium term“.
Finally, the stock appears to be attractively priced, especially compared to US peers. It trades at a forward earnings multiple of 18.8 versus 33.5 GE Aerospace and 20.5 because Company RTX.
To balance things out, I won’t be buying any more shares just yet. But that’s because I could find many better opportunities in the coming months, given Trump’s uncertainty.
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