BAE Systems’ share price benefits from “very strong year”

BAE Systems has said it’s been a “very strong year” for order intakes in a recent market update. As geopolitical tensions rise, triggered by Russia’s invasion of Ukraine, the defence contractor has benefited from increased government spending and a share price that has been one of this year’s standout performers. 

BAE Systems’ [BA.L] share price has been a standout performer on the FTSE 100 this year. Since the start of 2022, BAE’s stock price has gained 42% to close on Monday 21 November at 782p, easily outgunning the flat performance of the wider index.

A key driver has been increased government defence spending, triggered by Russia’s invasion of the Ukraine. The Financial Times reports that the defence contractor is in talks with the UK government on increasing supply of key munitions and long-term inventory levels. BAE chief executive Charles Woodburn told that paper that there “is a live conversation and we are ramping up production”.

BAE’s share price isn’t the only defence stock to benefit from heightened tensions, with rival Lockheed Martin’s [LMT] share price up over 35% this year.

A “very strong year” for BAE Systems

BAE said it was on course for a “very strong year” of order intakes in a market update published 15 November.

An additional £10bn worth of orders had come since the end of June, adding to the £18bn worth of orders made in the first half of the year. The biggest new order was a £4.2bn contract to build five new Type 26 frigates for the Royal Navy. The US Army was another large customer, spending £383m on new rocket system support services and $278m on all-terrain combat vehicles.

BAE said its “geographical diversity” underpinned its growth aspirations as it operates in countries that have increased defence spending, or are planning to, in order to address what it called an “elevated threat environment”.  The defence contractor added that contracts secured now would give it “long-term growth visibility”.

Woodburn said that a “large order backlog, diverse portfolio position and focus on programme performance” would deliver top line growth and margin expansion in 2023.

“We see sales growth coming from all sectors and opportunities to further enhance the medium-term outlook as our customers address the elevated threat environment,” Woodburn said in the update.

Full-year guidance remained unchanged with BAE expecting 2-4% growth in sales and a 4-6% rise in underlying earnings per share. The company generates a large portion of its earnings in US dollars and has benefited from the currency’s strength this year.

Beyond BAE’s share price

BAE isn’t the only defence contractor to have benefitted from sabre rattling between nations. Lockheed Martin [LMT] reported revenues of $16.6bn in its third quarter results, up from $16bn in the same period the previous year. Net earnings came in at $1.8bn, up from $614m the previous year.

Lockheed reported a 8% year-on-year jump in aeronautical sales to $7.09bn, driven by higher sales of the F-35 jet fighter programme. Strategic and missile defence sales helped its Space Systems division increase revenues 7% year-on-year to $2.88bn.

Lockheed Martin’s share price is now up 21% since the results were published on 18 October.

However, fellow contractor Boeing’s [BA] third quarter earnings delivered a surprise miss, with the company making a loss of $6.18 a share. Wall Street had been expecting earnings of $0.70 a share. Boeing said that revenue and profits were “significantly impacted by losses on our fixed-price defence development programsme”.

Analysts target upside on BAE Systems share price

JP Morgan upped its BAE Systems price target from 1,000p to 1,100p in a research note published on 7 November. Analysts at the bank had already hiked their target in early October, citing increased defence spending in the UK and BAE’s growth profile.

November also saw Redburn initiate coverage of BAE Systems with a ‘buy' rating. Analyst Olivier Brochet said that while upside may be limited in Europe, there could be further growth in export markets, such as the US.

In October, RBC analysts upped their price target on Lockheed Martin from $420 to $445, citing the company’s third quarter earnings, while Baird's Peter Arment upgraded his company’s rating from ‘neutral’ to ‘outperform'. Going the other way was Susquehanna’s Charles Minervino, who lowered his price target on Lockheed Martin from $539 to a still bullish $510.

Of the 14 analysts polled by Refinitiv, BAE Systems stock has a median price target of 890p, representing a 15.5% upside on Monday’s close. Lockheed Martin has a median target of 460p from the 21 analysts tracking the stock.