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Earnings: why BAE Systems shares remain at high altitude

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BAE Systems (LSE: BAE) shares remain near all-time highs after the defence giant announced its full-year preliminary results. Almost a year to the day since Russia launched a full-scale invasion of Ukraine, BAE reported record order flows for 2022.

The defence stock has soared around 50% over the last year, propelled by governments increasing their military budgets in the wake of the invasion. And as the war drags on, management is guiding for a strong 2023 too.

As I write, the stock is down only 0.8% at 897p.


BAE is one of the largest arms producers in the world, manufacturing everything from Eurofighter Typhoon jets to nuclear submarines, tanks and howitzers. Beyond its diverse product offerings — encompassing land, air, sea, and cyber — the company is also well diversified geographically. Customers are spread across the globe, mainly in the UK and US, but also the Middle East and increasingly Europe.

Western governments are committing more and more advanced weapons to the defence of Ukraine, and this will likely continue until there’s some sort of resolution to the conflict.

Fuelled by a strong US dollar — in which BAE receives a large portion of its revenue — sales to the end of December 2022 increased 9% year on year to £23.3bn. On a constant currency basis, sales were up 4.4% versus 2021. The group saw growth in all business segments.

Underlying earnings per share increased 9.5% to 55.5p, with growth measured again at a constant currency. Free cash flow of £2bn was above expectations.

Expanding order book

Those figures may not sound particularly eye-popping considering the geopolitical backdrop. But the company’s order book is expanding rapidly. Last year, the group took in a record £37.1bn in new orders, increasing its order backlog to £58.9bn. These contracts are obviously multi-year in nature, providing a predictable stream of revenue and profits way into the future.

The final dividend increased was increased 7.6% to 27p. The dividend yield stands at a respectable 3%. The payout is covered two times by underlying earnings.

Looking ahead to 2023, BAE expects underlying operating profits to grow in the 4% to 6% range. And management is targeting free cash flow of £4bn to £5bn between 2023 and 2025. If it achieves that, and I see no reason to doubt that it will, the company seems well placed to continue increasing its payouts.

Will I add to the stock?

The stock has a price-to-earnings (P/E) ratio of 20.7, which is above its median for the last few years. So there could be valuation risk buying in at today’s price.

I only bought the stock a few months back, and I’m happy with the sizing of my holding. So I won’t be buying any more shares, as things stand. However, if the share price were to decline over the coming weeks, I’d consider topping up.

That’s because, unfortunately, the genie is out of the bottle after the terrible events in Ukraine. Even if a hoped-for ceasefire was announced, I’d still expect military budgets in Europe and elsewhere to increase rapidly. As the largest defence contractor in Europe, BAE sells the weapons countries need to protect themselves.

The post Earnings: why BAE Systems shares remain at high altitude appeared first on The Motley Fool UK.

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Ben McPoland has positions in BAE Systems. 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.

Motley Fool UK 2023