The BAE Systems (LSE: BA.) Shares rose 1% on Thursday morning (1 August) following first-half results.
Even after a recent decline, we still expect growth of 18% for 2024. And 140% over the last five years. Can it continue like this? Let’s see what the first half of the year brought.
Forecast raised
CEO Charles Woodburn said the company was “well positioned for sustainable growth in the coming years.” And the company raised its forecast for the full year.
BAE now expects full-year revenue to increase by 12% to 14%, adjusted EBIT to increase by the same percentage and adjusted earnings per share (EPS) to increase by 7% to 9%.
This suggests a price-to-earnings ratio (P/E) of around 19 at year-end, based on the current share price.
Is that a good value? Well, it’s obviously not cheap for those who use the PEG ratio. This compares the forward P/E ratio to the forward EPS growth rate. And anything below 1 is often considered attractive.
In this case, however, we would look at a PEG of around 2.4.
Bags full of cash
But BAE Systems has more to offer than just growth. The company generates strong cash flow from which it can pay dividends.
Free cash flow was a low £219 million during the period, but BAE expects it to exceed £1.5 billion by the end of the year, taking free cash flow for the three years to 2024 to over £6 billion.
The interim dividend is up 8% to 24.5 pence per share. The same increase in the final dividend should bring the full year yield to 2.5%. Hmm, that’s really not great, is it?
Dividend coverage
Well, it might be better than it seems. BAE’s dividends are typically more than double covered by earnings, and forecasts suggest that this will continue.
Strong coverage coupled with dividend increases that outpace inflation can be worth more in the long run than a higher yield today.
When we take into account an order backlog of £74 billion and forecasts that suggest a P/E reduction to 16 by 2026, BAE Systems shares are a no-brainer, right?
Cautious optimism
Well, I’m optimistic but also cautious. I see short-term risks but solid long-term prospects for many stocks right now.
At BAE, I firmly believe that this trend could be reversed. At the moment, these impressive figures are due to the increase in global defense spending. Ukraine, the Middle East and other threats are driving up defense budgets.
But how long will this last?
Future budgets
The US budget proposal for 2025 only calls for a 1% increase in defence spending. And the new British government has already announced a strategic review of defence.
Much could depend on how long it takes EU countries to bring their spending up to the targeted level of 2% of GDP. And, of course, whether they stick to it once the current threats subside.
In my opinion, BAE Systems’ share price looks OK and the market’s muted reaction to this update reinforces that view. I will wait and see how the full year plays out.
The post “Is BAE Systems’ share price cheap after first-half results hit 52-week high?” appeared first on The Motley Fool UK.
Further reading
Alan Oscroft does not own any of the stocks mentioned. The Motley Fool UK has recommended BAE Systems. The views expressed in this article about the companies mentioned in this article are those of the author and as such 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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