Why the BAE share price could soon take off

Key points

  • Earnings and revenue results are historically strong
  • The firm has a lower P/E ratio than a major competitor
  • Free cash flow is expected to be in excess of £1bn

A stalwart of the aerospace and defence industry, BAE Systems (LSE: BA.) operates across the US, Europe, Middle East, and Australia. With strong historical results and a relatively low price-to-earnings (P/E) ratio, I think the BAE share price could soon rise. To that end, I think it could be a central component of my long-term portfolio. Let’s take a closer look.    

Strong and consistent results

Results from the calendar years 2016 to 2020 tell a story of sustained growth, both in earnings and in revenue. For 2016, the earnings-per-share (EPS) was 40.3. By 2020, however, this figure had risen to 46.8p. By my calculations, this means that the company has a compounding annual EPS growth rate of just over 3%. While this is far from heart-stopping, it is nevertheless consistent for shareholders.

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Furthermore, the firm’s revenue has increased steadily over the same period. Specifically, it has increased from £17.7bn in 2016 to £19.2bn in 2020. This is testament to the long-standing demand for the company’s aerospace and defence products. These strong results are what underpin the BAE share price.

Interestingly, the P/E ratio is 10.91. On its own, this means very little, but compared to a competitor it can indicate if a stock is over- or undervalued. QinetiQ Group, a business that is also engaged in aerospace and defence and a strong competitor, has a P/E of 19.94. This is above the BAE P/E ratio and may suggest that the BAE share price is undervalued.

The BAE share price and recent developments  

The business published its interim results in November 2021. It stated that free cash flow was expected to be in excess of £1bn. Furthermore, guidance was for a 10% rise in profit and 3%-5% increase in EPS. Indeed, the firm has completed around 60% of a share buyback programme. This allows BAE to return cash to shareholders by repurchasing its own shares.

The interim results also show a healthy order pipeline involving electric, air, and maritime segments. Altogether, this amounts to just short of $2bn. The same month, the business announced the purchase of Bohemian Interactive Solutions. This is a military training simulation software company and is a move by BAE into the field of simulated training products.

JP Morgan recently downgraded the company on account of its exposure to the US market, that is “now in a slowdown“. Nonetheless, BAE believes its diverse geography enables it to better “counter evolving threat environments“. It makes special mention of its maritime relationship with Australia. Indeed, this relationship aims at securitising the Asia Pacific region.    

This is a company enjoying strong growth and delivering for shareholders year in, year out. The business is expanding and may be undervalued. With its order pipeline and free cash flow, I think the BAE share price could soon take off. I will be buying shares without delay.

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Andrew Woods has no position in any of the shares mentioned. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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