BAE Systems (LSE: BA.) shares have been one of the FTSE 100’s best buys in recent years. Over the last two years, they’ve risen about 65% versus approximately 2% for the index.
Are they still a great buy today? Or are there better stocks to snap up? Let’s discuss.
Multi-year defence spending boom
Looking at BAE Systems today, there’s a lot to like about the company from an investment perspective, to my mind.
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Recently, the group has benefitted from the high level of conflict and tension. According to the Stockholm International Peace Research Institute (SIPRI), world military expenditure hit a record $2.24trn last year.
Looking ahead, I think we can expect spending on defence to remain elevated.
Some analysts think we could be in the midst of a multi-year defence spending boom. For example, analysts at Morgan Stanley see average annual defence budget growth of 5% across Europe all the way out to 2030 (Morgan Stanley has named BAE Systems as its top pick in the sector).
It’s worth noting that in a recent trading update, CEO Charles Woodburn was optimistic about the future. “Order flow on new programmes, renewals and progress on our opportunity pipeline remains strong,” he said.
“Our global presence and diverse portfolio of products and services provide a high visibility for top line growth, margin expansion, and cash generation in the coming years,” he added.
So I think the medium-term outlook for the defence company is quite favourable.
Attractive valuation
As for the stock’s valuation, I believe it’s attractive right now. Currently, analysts expect BAE to generate earnings per share of 59.2p for 2023.
That puts the stock on a forward-looking price-to-earnings (P/E) ratio of 15.1 at present, which isn’t particularly high.
One broker who clearly sees share price upside from here is Jefferies. It currently has a price target of 1,100p for the stock. That’s about 22% above the current share price.
Capital returns also look attractive, to my mind. Not only does the company offer a nice dividend (the yield is currently about 3.2%) but it is also buying back shares. These buybacks should boost earnings per share over time.
Putting this all together, I do think BAE Systems remains one of the best buys in the Footsie.
Share price risk
It’s worth pointing out however that the shares have lost their upward momentum recently. Over the last three months, they’ve fallen about 10%.
I expect them to bounce at some stage and move higher. But there’s a chance the recent downtrend could continue. Sometimes, trends can last longer than expected.
Therefore, if I was looking to buy the shares today, I wouldn’t buy a full position immediately. Instead, I would buy a few shares now and add to my position over time.
