Now around 1,885p each, BAE Systems‘ (LSE:BA.) shares have performed splendidly for me since I bought them at 819p in November 2022. I also added twice on weakness in 2024.
However, since peaking at 2,360p in March, BAE’s slumped 20%. And the defence stock’s now gone sideways over the past 12 months, noticeably lagging the FTSE 100‘s 19% return. That’s quite disappointing.
The question I’m asking myself now is, should I recycle my gains into a different stock?
Sector sell-off
On one level, I’m not worried about BAE stock specifically as it has been caught up in a wider defence sector sell-off. In fact, it’s fared relatively well compared to others like Babcock International (down 33% since January) and Rheinmetall (down 45% since January).
And while the wars in Ukraine and Iran are hopefully going to end sooner rather than later, they won’t just be forgotten about. NATO allies and Gulf states are still committed to beefing up defence capabilities for any future conflicts.
But will Europe actually find the money to re-arm properly? After all, Germany just abandoned its planned six-ship F126 frigate programme.
Meanwhile, we’ve seen recently how the UK government has struggled to stump up what many military experts say is needed to defend the realm. Remember, Western European economies are stagnant and heavily indebted.
If the expected defence spending boom is delayed due to political wrangling, then investors could sour further on European defence stocks. They may even face a period in the wilderness.
The changing nature of warfare
Another risk is that warfare is changing. Cheap drones have been deployed widely in the Ukraine and Middle East conflicts, raising concerns that tanks and frigates are potentially expensive sitting ducks.
Areas of the defence market are developing at a rapid pace. Technology is being embraced, and a number of companies are competing, including new entrants who often don’t come from a purely defence background. This includes in drones [and] counter-drone systems.
BAE Systems.
However, recognising that allies can’t keep firing expensive missiles at swarms of cheap drones, BAE’s prioritising lower-cost interception methods, including electronic warfare jamming.
Back in 2024, BAE also acquired UK drone specialist Malloy Aeronautics to break into the unmanned systems market. As part of its Defence Investment Plan, the government has just committed £5bn to drones and autonomous systems.
So while the changing nature of warfare is something to monitor, I’m not overly worried. BAE already has a leading electronic systems division, which is probably more relevant than ever in this age of drone warfare.
My move
CEO Charles Woodburn says the defence giant’s order backlog and incumbent programme positions total around £260bn, nearly nine times annual sales.
And some of the biggest programmes, like the Global Combat Air Programme and AUKUS submarines, don’t come into full production until the mid-2030s. Then there will be new opportunities arising from higher defence spending.
Stepping back then, I think the long-term investment case here remains very strong. And the price target is 23% higher, suggesting the stock could turn £5k into more than £6k by next July (assuming these broker forecasts prove accurate, of course).
Weighing everything up, I’m not selling, and I actually think BAE’s dip is worth considering buying. It’s one of a few FTSE 100 opportunities I see right now…
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Ben McPoland owns shares in BAE Systems.
