A share that we should have in our sights now?
BAE, valued at £38.2billion, is Britain’s biggest player in defence and the largest contractor in Europe. Its products include nuclear submarines, combat vehicles and the Harrier, Hawk and Typhoon jets.
The shares have been boosted by war in Ukraine and are set to be even more in focus. Pressure is growing on Keir Starmer to set out a timetable for raising UK defence spending to 2.5 per cent of GDP to counter the mounting level of threat. Nato numbers show that the current outlay is 2.3 per cent.
Tell me about BAE
It was created from mergers that brought together such illustrious British Aircraft Corporation, Hawker Siddeley and Marconi. But BAE, which sells to the UK, the US and to the AUKUS alliance (Australia, US and the UK), continues to innovate.
This year it bought Malloy Aeronautics, a UK start-up that makes unmanned drones for logistics missions.
How have shares done?
Before Russia invaded Ukraine in February 2022, they were 599p. They are now 1268p, 112 per cent higher. The Hamas attack on Israel last year added to the momentum.
There has been a shift in the perception of defence stocks. Widely viewed as unethical, they are now seen as a means of upholding democracy.
The Investment Association says: ‘Investing in defence companies contributes to our national security, defends the civil liberties we enjoy, while delivering long-term returns for pensions funds and retail investors.’
So why have they dipped?
There has been some weakness over the past four weeks.
This appears to stem from fears that populist policies in Europe could reduce defence budgets – on the basis that far-Right politicians tend to be pro-Putin.
Another reason was the belief that ending war in Ukraine (whenever this comes to pass) would curtail spending in the US, UK and elsewhere, regardless of the politics of nations’ leaders.
As a result, BAE and other European defence stocks have been seen by some as overvalued. At the start of war in Ukraine in 2022, BAE was trading at 13 times earnings. It is now trading at a premium of 21 times.
Are these overvaluation fears warranted?
It is always reasonable to question the valuation of a share whose price has soared by 41 per cent over the past year. Yet war in Ukraine has changed governments’ long-term thinking.
Against the background of tensions in the Middle East and enhanced potential for conflict elsewhere they would be unlikely to slash budgets.
Saima Hussain of the research group Alpha Value comments: ‘Geopolitical tensions continue to underpin momentum in defence stocks.’
Most analysts agree, rating BAE a ‘hold’ or a ‘buy’.
The average target price is 1460p. But JP Morgan’s is 1500p.
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