BAE Systems‘ (LSE:BA.) shares have rocketed in value since the start of the Ukraine-Russia conflict. Over five years, the FTSE 100 defence giant’s soared an incredible 257% in value to £19.15 per share. That’s even after heavy profit booking among investors that’s dented momentum more recently.
Sales are booming against the unfortunate backdrop of rising conflict and a changing geopolitical order. And the market’s expecting customer orders (and therefore BAE’s profits) to keep soaring. It’s why the stock now commands an enormous valuation — at today’s share price, its forward price-to-earnings (P/E) ratio is a lofty 25 times.
That’s miles above the 10-year average of 14-15. And it’s making me consider whether this could put the cap on further share price gains. But here’s the thing: City analysts think BAE Systems shares could rise another 17% over the next year. At this rate, a £9,999 investment in the company today would turn into £11,699 by July 2027.
But how realistic is this forecast?
Strength in depth
No share price target is ever guaranteed. Even experienced analysts can get their forecasts wrong when circumstances around a company or industry change. However, I think BAE Systems has a good chance of meeting — or even exceeding — current City expectations.
That 17% upside target (to £23.05 per share) is based on the opinions of 18 different analysts. That gives a broad and balanced picture of how City brokers think the company may perform.
That said, it’s never a good idea to rely solely on other people’s opinions when investing. So alongside considering those analyst forecasts, I’ve weighed up the key factors that could propel BAE Systems shares higher or hold it back. They include:
The bull case
- Accelerating defence spending among NATO countries.
- Successful innovation in growth areas like cybersecurity and space systems.
- Growing momentum in the US, the world’s largest defence market.
- Robust cash returns to shareholders via further share buybacks and dividend hikes.
- Further steady declines in net debt.
The bear case
- Cooling geopolitical tensions and reduced weapons demand.
- Rising labour and material costs that hit margins.
- Supply chain issues that cause production delays.
- Contract losses to US defence firms under an ‘America First’ policy.
- Currency volatility that reduces earnings from overseas regions.
Are BAE Systems shares a Buy?
Investing in any share’s a risk. And especially one that trades on an historically-high valuation like BAE Systems does. But, on balance, I think adding the company to an ISA or Self-Invested Personal Pension (SIPP) is worth serious consideration.
The FTSE 100 firm has a strong record of execution in a rapidly growing industry. As such, it’s in great shape (in my view) to achieve the 7%-9% annual sales growth its targeting over the next few years. This, in turn, could propel BAE’s share price to new heights.
A £9,999 investment in BAE Systems shares five years ago would be worth £35,697 today. I’m optimistic the company can continue delivering those sorts of excellent returns given the current health of the defence industry.
Should you invest £5,000 in BAE Systems right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BAE Systems made the list?
Royston Wild does not hold any positions in the companies mentioned.
