Image source: Getty Images
BAE Systems‘ (LSE: BA.) shares have become a victim of their own success. They did too well for too long, and became a little too expensive as a result.
BAE’s one of the world’s biggest defence companies, employing more than 110,000 people across more than 40 countries. In today’s warlike world, its combat aircraft, submarines, missiles, ammunition and drones are in demand.
The shares have risen around 266% over five years, turning a £10,000 investment into more than £36,600, with dividends on top. Yet after hitting 2,360p in March, they fell sharply and remain about 14% below that peak. Today, they trade at 2,032p.
So is something wrong with the company? Nope. BAE Systems is firing on all cylinders. Latest half-year results showed sales up 9% to £15.8bn, while underlying operating profit climbed 11% to £1.7bn. The board upgraded its full-year guidance, so the outlook’s upbeat too.
The group’s order book stood at a record £84bn at the end of June, giving BAE exceptional earnings visibility. It keeps securing new business, with the order intake up £16.4bn in six months.
Investors are coming back
So why has the share price dipped? One reason is that investors have taken profits. After such a spectacular run, that’s hardly surprising. Buyers may also have baulked at the valuation. Lately, BAE’s traded on a price-to-earnings (P/E) ratio as high as 28, compared with an average of around 16 across the FTSE 100.
Yet some investors have been buying the dip. The shares gained about 5.5% in the five days to 16 September, including a 3.4% jump on 15 September. Trading volume that day was 6.9m shares, above the 50-day average of 5.7m. I suspect investors have been following the news, which isn’t good.
Rather than cooling, the war in Iran seems to be simmering. The Ukraine conflict is still red hot. It’s a sad reflection on humanity but, unfortunately, good news for weapons makers.
BAE Systems’ share price is hardly a bargain buy though, with the P/E now 26.9. At that price, it needs to keep hitting, or ideally beating, expectations. The trailing yield’s a modest 1.8%.
Should you consider buying the dip?
So what do the experts say? The 19 analysts offering one-year share price forecasts produce a consensus target of 2,333p. If correct, that would see the shares climb almost 15% from today. As someone who holds the stock, I’d be happy with that.
The recent dip handed investors a slightly more tempting entry point. I wouldn’t call BAE Systems a screaming bargain though. But given that mighty order book, I’m not exactly sure when it will be.
This is the type of stock that investors should approach with a long-term view. Any dip’s worth considering but, ultimately, if investors want to access its growth potential, they have to pay the prevailing price. If you fancy a cheaper FTSE 100 growth stock, I can see plenty out there…
What growth stock do we like better than BAE Systems right now?
One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential growth.
And the best bit is that you can see if for yourself, right now, absolutely free of charge!
No jargon. No hard sell. Just a clear look at a growth share idea we think is worth your time.
Harvey Jones owns shares in BAE Systems.
This story originally appeared on Motley Fool
