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BAE Systems‘ (LSE: BA.) share price is down 14% since 12 November in the one year high trading at £14.15.
This followed the release of its Q3 trading statement, although this had less to do with what it contained than a pause taken to take profits, I think.
After all, the stock is up 20% so far this year. It is also up 104% from its opening price on the morning of February 24, 2022 when Russia invaded Ukraine.
What was in the trading statement?
The defense giant confirmed its positive full-year 2024 financial performance guidance given in its August 1 H1 results.
In particular, it increased its annual sales growth estimate to 12%-14% by the end of 2024 from 10%-12%. It raised its forecast for earnings before interest and tax growth to 12%-14% from 11%-13%. It also raised its underlying earnings per share growth forecast to 7%-9% from the previous 6%-8%.
The company also increased its free cash flow target to more than £1.5bn from more than £1.3bn.
Several new deals in Q3 were highlighted, including the €2.5bn BAE Systems share in the MBDA project. This is a joint venture between a UK firm, and Airbus again Leonardo designing and manufacturing missiles and missile systems.
Since the statement was issued, the company has been awarded a $202m US Navy contract and a subsequent US Army contract for an undisclosed amount.
Are shares irrelevant?
The main risk to the stock in my opinion is a major failure of one of the company’s core products. This can be costly financially and can damage its reputation.
However, as it stands, the stock seems irrelevant to me in the few key steps I use. On a price-to-earnings (P/E) ratio, BAE Systems currently trades at just 20 compared to a peer ratio of 35.2. So it looks cheap on this basis.
The same applies to its price-to-sales (P/S) ratio of 1.5 compared to a peer group average of 3.9.
To translate this partial valuation into share price terms, I performed a discounted cash flow analysis. Using other analysts’ calculations and my own, this shows that BAE Systems shares are 23% undervalued at their current price of £12.21.
Therefore, the fair value of the stock is £15.86, although it could be lower or higher, given the uncertainty of the market.
Will I add to my catch?
BAE Systems is one of the very few low-yield companies that I kept after I turned 50. In 2023, it paid a dividend of 30p, which makes 2.5% now.
Most of my other stocks give me more than 7% yield. I intend to increase my income from these stocks to reduce my work obligations.
That said, I have added to my holdings in the defense company over the years because of its high growth in my opinion. This is ultimately what makes the company’s stock price (and profits) rise over time.
This investment rationale still looks strong to me for BAE Systems. So, I will be buying more shares in the near future.
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