FTSE 100

Can the BAE share price sustain its recent rise?

Aerospace and defence company BAE (LON: BA) has delivered a 17% share price rise since the start of the year. This compares to a 12% gain for the FTSE 100 index (INDEXFTSE: UKX) over the same period.

Encouragingly, the firm’s latest trading statement confirmed that it is on track to meet financial guidance for the full year. It expects to deliver sales and underlying earnings per share growth of between 3% and 5%. Moreover, it is on target to meet its three-year free cash flow goal, which suggests it is making progress in delivering its overall strategy.

A key part of this is investing in advanced technologies. Indeed, BAE announced last week a definitive agreement to acquire Bohemia Interactive Simulations. It is a developer of advanced military simulations that includes the US military among its major customers. The deal is subject to regulatory approval but shows that BAE appears to be further evolving its business to keep up with changing demands across the defence sector.

Of course, the long-term outlook for the global defence industry remains highly uncertain. Following improving trading conditions over recent years due to rising defence budgets, the industry’s outlook could be constrained by rising government debt levels prompted by Covid-19. This may mean conditions become more similar to those following the global financial crisis when reducing government deficits via cost cutting measures was a key political theme.

As such, the prospects for BAE’s financial and share price performance remain relatively opaque and represent a risk to investors. However, it could be argued that they are factored into what remains a relatively modest valuation. Indeed, the company’s shares trade on a forward price-earnings ratio of 13. This seems a fair price given that the firm is forecast to post a 7% annualised rise in earnings per share over the next two financial years.

Meanwhile, its dividend yield of 4.4% remains around 100 basis points higher than that of the FTSE 100 index. This could equate to higher demand for its shares as, even though interest rate rises seem likely, the challenges of obtaining an above-inflation income from assets such as cash and bonds is likely to remain high for the foreseeable future.

As such, with BAE offering a relatively generous yield, an improving financial outlook prompted by an evolving business model and a modest valuation, it appears to offer good value for money relative to the wider FTSE 100 index.

Not Investment Advice Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.

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