BAE Systems shares have several trends going in their favour. Some are fundamental, and some are related to technical analysis of the BAE share price.
The company has been one of the best-performing FTSE 100 stocks since the beginning of 2024. With a gain of 21% since the turn of the year, BAE Systems is in the top ten performers.
Two distinct trends support shares. First, underlying geopolitical trends are helping support earnings. Second, the stock is in a firm uptrend, and technical analysis suggests the BAE Systems share price has more to run.
BAE Systems was one of Hargreaves Lansdown’s most traded shares over the past week. And for good reason.
From a fundamental standpoint, BAE Systems is experiencing high structural demand for its defensive products. The tragic conflicts unfolding worldwide are driving increased defence spending by developed market governments.
BAE Systems group sales grew 9% in 2023 to £25.3bn from £23.3bn in 2022.
The company is involved in the world’s largest defence project, the F-35 Lightning II fighter jet programme, which provides BAE a decade’s worth of order flow to deliver 3,000 aircraft. The Typhoon aircraft accounted for 36% of BAE Systems sales in 2023 as the company services the defensive requirements of countries including Qatar, Germany and Spain.
Underscoring future demand from these countries, Qatar’s defence budget grew 33% between 2021 and 2022 and is expected to expand defence spending at a 6% CAGR between 2025 and 2029. Germany is planning to increase defence spending to 2% of GDP.
In addition to Typhoon jets, Germany has recently placed an order for 227 BvS10s tracked vehicles, one of BAE Systems’ strategic orders for 2023.
The US has the world’s biggest defence budget and is naturally BAE System’s largest customer, accounting for 42% of BAE’s sales in 2023. BAE Systems has multiple long-term projects with the US, spanning munitions, aircraft and defence systems.
Spending across major customers is expected to remain elevated, supporting sales growth in the years ahead. The group is doing an excellent job of converting higher sales into higher margins, which increased to 10.6% in 2023. Margin expansion at BAE Systems’ scale is hard to come by, so this must be applauded.
BAE Systems Valuation
BAE Systems sales and profit growth have driven the share price higher, but not to levels that could make the stock look overvalued. Trading at 19x forward earnings, BAE shares are reasonably valued. They aren’t undervalued by any stretch of the imagination, yet future sales growth supports the current valuation.
Technical attractions
BAE Systems shares have been in a solid uptrend since the lows of 2020, providing investors with spectacular returns. The trend remains intact, and BAE Systems shares have passed a number of tests of this trend in recent months.
The 50-day moving average is providing consistent and robust support. The trend was tested numerous times in early April, and the stock rebounded to trade close to recent highs.
A word of caution. The stock has failed in the 1,360p-1,380p region on a number of occasions and a level of resistance is starting to form. If broken, the stock will be in blue sky territory.
Investors are buying into any dips, and the BAE Systems share price has made a series of higher lows in recent weeks. This supports the ongoing uptrend.
