A once-in-a-decade opportunity to buy BAE Systems shares at a ‘low price’?
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BAE Systems (LSE: BA.) shares have been rising, but investors may be wondering if the rally is just getting started. As international tensions rise and NATO allies pile up defense budgets, could this be the buying opportunity of a generation?
Why the defense giant is thriving
As I write early on 3 March, the shares are trading at 2,240p following recent stellar results and a worrying escalation of tensions in the Middle East.
The company reported modest earnings per share growth of 12% through 2025, driven by record orders across all divisions.
The order book now stands at £74bn, providing strong revenue visibility to few others in FTSE 100 Index can be compatible. Add to that the current state of the world and it’s no wonder investors are eyeing the company’s shares.
UK defense spending is set to reach 2.5% of GDP by 2027, while Germany has committed €100bn to military development.
Ongoing conflicts in the Middle East could accelerate procurement cycles, with BAE winning important contracts for fighter jets, naval vessels, and weapons.
The specialized nature of defense manufacturing creates significant barriers to entry, limiting competition and pricing power.
The company’s cash flow remains strong, meaning management can return cash to shareholders through stock dividends and buybacks while investing in the future. The dividend yield currently sits at 1.6% as I write, lower than many of Footsie’s peers but supported by strong earnings growth.
We haven’t really seen an investment property like this in the last decade. Interest rate policy and inflation concerns remain. The war between Ukraine and Russia continues, overshadowed by the US-Iran conflict.
This may indicate a major structural change in global defense spending. BAE Systems may be well positioned for a major turnaround in pricing expectations compared to the last 10 years amid turmoil.
Risks that cannot be ignored
While the opportunity is tempting, investors should weigh several company-specific factors.
BAE faces intense competition from US defense giants such as Lockheed Martin benefiting from high US defense spending and high technology.
Winning international tenders against these competitors requires constant innovation and competitive pricing, which can squeeze margins.
Maintaining profitability in fixed price contracts is also an ongoing challenge. Defense projects are prone to delays and cost overruns, and BAE has to act flawlessly to secure boundaries on multi-year projects.
Any significant program setbacks can damage both its finances and reputation.
And the stock currently has a forward price-to-earnings (P/E) ratio of about 26 times. That means a good idea may already have value.
My decision
In my view, the stock represents a rare combination of strong market position, good earnings visibility and favorable industry dynamics.
The company is sadly benefiting from political tensions and increased defense spending, though we wish it weren’t. There is limited competition in specialty areas as well.
However, they don’t come cheap. The share price reflects high growth expectations. There are still major risks involved in the delivery of programs and commitments to government spending. Investors also need to be comfortable with the ethics of investing in this sector.
The current valuation is not a historical transaction for BAE Systems shares. However, its potential major structural and structural changes in the defense sector may mean that it is not ‘cheap’ again in the next decade. In my eyes, that makes it an opportunity to think.
