The FTSE 100-listed BAE Systems PLC (GB:BA) is well-placed to capitalize on higher defence spending in the coming years. Since the outbreak of war between Russia and Ukraine, the company has witnessed huge demand for its products, which was reflected in the share price as well.
Over the last 10 days, the BAE share price has gained around 10% after Hamas launched an attack on Israel. The ongoing conflict between Hamas and Israel has once again put the spotlight on the defence stocks. These wars have resulted in an upsurge in the defence budgets of the countries, creating a robust growth platform for defence companies.
Year-to-date, the stock has experienced a gain of 40% in trading.
BAE Systems is a leading British manufacturer and supplier of defence products spanning the air, land, and marine sectors. The company has a global presence in around 40 countries.
Let’s see what makes analysts bullish on the stock.
Strong Order Growth, Raised Guidance
In its most recent earnings report, the company posted a jump of 11% in its sales of £12 billion for the first half of FY23, with growth recorded in all its segments. The underlying earnings increased by 10% to £1.3 billion. The highlight of the results was the record order intake of £21.1 billion, leading to a backlog of £66.2 billion. Driven by such solid numbers, the company has raised its full-year guidance for earnings growth to 10%–12%, up from 5%–7% forecasted earlier. The expected sales growth for the full year is also lifted from 3%–5% to 5%–7%.
Since the release of its results in August, the company has secured more contracts as part of the AUKUS alliance. In October, BAE was awarded funding worth £3.95 billion by the Ministry of Defence as part of a “next-generation nuclear-powered attack submarine program known as SSN-AUKUS.” This funding will support the company’s infrastructure and development work until 2028. The first boat under this program is scheduled to be delivered in the late 2030s.
Analysts are Bullish
Analysts believe that the growing defence spending, especially in Europe, will continue to last for years to come. This bodes well for the company’s long-term earnings growth, considering its stronghold on specialized military equipment. Moreover, the visibility of the future revenue stream makes the earnings case stronger.
14 days ago, Ian Douglas from UBS reiterated his Buy rating on the stock, forecasting a growth of 12.86% in the share price. He also raised his price target from 1,160p to 1,220p.
On the same day, Berenberg Bank analyst George McWhirter upgraded his rating on the stock from Hold to Buy, predicting an 8% increase.
Are BAE Shares a Good Buy?
Overall, analysts are bullish on the stock; however, the growth potential is limited due to already high trading levels. According to TipRanks, BA stock has a Strong Buy rating based on a total of 10 recommendations, of which nine are Buy. The BAE share price target is 1,202.57p, which is 11% above the current trading levels.
