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Why the BAE share price could continue rising after 40% gain

Peter Stephens

Since September 2015, the BAE (LSE: BA) share price has gained around 40%. That’s a stunning rate of growth after what had been a difficult number of years for the business. A challenging trading environment during the era of austerity had meant that demand for its products had come under pressure.

Now, though, the company appears to have a brighter future. Spending on the military looks set to rise across the developed world, while a relatively efficient business model could mean that further share price gains are ahead. As such, now could be the perfect time to buy the defence company.

Improving prospects

With the developed world now experiencing improved economic performance following the financial crisis, defence budgets look set to increase. A period of cuts for the military may now be at an end, and this could lead to a potential tailwind for companies across the sector.

Of course, Donald Trump’s election as US President could prove to be a key growth catalyst for companies operating in the industry. He has been clear on his desire for higher spending on defence for a significant period of time and with it now becoming a reality, the prospects for the sector appear to be stronger than they have been since prior to the financial crisis.

Total returns

While BAE has risen by 40% in the last couple of years, the company continues to offer a relatively wide margin of safety. Its price-to-earnings (P/E) ratio of 15 suggests that it is fairly priced given its forecast earnings growth rate of 7% for the next financial year. And with it currently yielding 3.9% from a dividend, which is covered around twice by profit, its total return potential seems to be high.

Certainly, defence stocks are not immune to the volatility seen in the wider market in recent months. However, with that potential tailwind, they could perform better than the FTSE 100 over the medium term.

Impressive performance

Also offering strong growth potential after a period of gains is property fund manager and investor First Property Group (LSE: FPO). Its shares have risen by 177% in the last five years, with an impressive financial performance likely to have been a key catalyst.

The company released a positive trading update on Monday, with it announcing that profit, before tax, for the year to 31 March is expected to be in line with market expectations. During the year, the company was able to deliver a 31% rise in funds under management, with almost all of the growth  resulting from new property investments in the UK.

Looking ahead, First Property Group is expected to report a rise in its bottom line of 4% in the current year. While not a particularly high rate of growth, its P/E ratio of 9 suggests that it could offer upward re-rating potential. And with a dividend yield of 3.5%, which is covered 3.6 times by profit, its total returns could continue to be high over the coming years.

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Peter Stephens owns shares of 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.