Shares in defence powerhouse BAE Systems (LSE: BA.) have pulled back recently. Currently, they’re trading for 1,833p – about 22% below their 52-week high of 2,360p.
Is there an opportunity to consider here? Let’s take a look at City analysts’ 12-month price targets for clues.
Price forecasts for BAE Systems
Analysts are generally bullish on BAE Systems, despite the fact that the shares are up nearly 250% over the last five years. Of the 21 brokers covering the name, 13 see it as a Buy or Strong Buy.
At present, the average price target is 2,295p – roughly 25% above the current share price. If that price forecast was to come to fruition, £5,000 invested in the shares today could be worth around £6,250 in a year’s time and that’s before dividend payments.
Do the numbers stack up?
Is that consensus price target realistic? I think so, but it may be a little bit optimistic.
For 2027, analysts expect the defence company to generate earnings per share of 94.7p. So for the share price to hit 2,295p, the forward-looking price-to-earnings (P/E) ratio would have to rise to 24, assuming that forecast is accurate.
Now, we could see that kind of earnings multiple if geopolitical uncertainty is high next year. In this scenario, investors might be willing to pay a hefty premium for defence shares.
However, if geopolitical tensions ease, we might be looking at a lower P/E ratio of say, 20 to 22. Taking that 2027 earnings forecast of 94.7p, we get a price target of 1,894p at a multiple of 20 and 2,083p at 22.
Is there an investment opportunity here?
So, is there an opportunity at current prices? I believe so – I see the potential for attractive returns from the shares in the years ahead.
Even if geopolitical tensions ease, the backdrop for BAE Systems is likely to remain favourable since countries all over the world are ramping up their defence spending. Here in the UK, soon-to-be-ex-Prime Minister Keir Starmer just pledged to spend an extra £15bn to modernise Britain’s depleted armed forces.
Around the world, security threats continue to grow, leading governments to increase defence spending.
BAE Systems
Given this backdrop, the company’s earnings are expected to rise at a healthy rate. The earnings forecast for 2027, for example, is 14% higher than the forecast for 2026.
Note that there’s a dividend yield of around 2% too. So, if the shares were to rise 10% over the next year, total returns would be closer to 12%.
In terms of risks, supply chain costs are something to consider. If costs were to surge, BAE Systems’ earnings could come in below expectations.
Sentiment towards defence shares is another. We could see the defence premium dissipate if global tensions ease.
I like the risk/reward skew after the recent share price pullback, however. I believe the shares are worth considering for an ISA or SIPP.
Should you invest £5,000 in BAE Systems right now?
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Edward Sheldon does not hold any positions in the companies mentioned
