The BAE (LSE: BA.) share price has been soaring recently, due to heightened tensions around the world. This has benefited BAE because it increases the chance that countries will raise their defence budgets. Even so, there are some who see this as a short-term boom, and if a much-hoped ceasefire is announced in Ukraine, the share price is likely to fall back. As such, has the BAE share price now reached its peak, or is there plenty more room to grow?
There has always been a positive correlation between the defence budgets of governments and BAE revenues and profits. In the past few years, this has benefited the company, because one of its main customers, the US, has increased its defence budget by around 15% over the past five years. Due to the current threat posed by Russia, I expect that the defence budget will continue to increase. This is likely to offer a further boost to the share price.
Even before the tragic conflict, BAE was performing excellently though. For example, in 2021, it saw a year-on-year sales increase of 5% to reach £21.3bn. Underlying EBIT was also able to rise 13% year-on-year, reaching £2.2bn. Such strong results were attributed to the company’s diverse portfolio and wide range of customers. They have also allowed the company to boost its shareholder returns, announcing a full-year dividend of 25.1p per share. At the current high share price, this equates to a yield of around 3.5%. As such, the recent rise in the share price has not solely been caused by the Ukraine-Russia conflict.
Has the BAE share price got further to rise?
Despite the recent price rise, BAE still trades at a reasonable value, I feel. In fact, based on its 2021 results, it has a price-to-earnings ratio of 13. This suggests the company only expects modest growth. Therefore, if profits can increase drastically due to the current geopolitical tensions, the upside would be immense.
There are other positive factors as well, such as the recent decrease in net debt. Indeed, net debt now totals under £2.2bn, whereas it had previously reached over £2.7bn. In previous articles, I have written about the company’s debt pile being too high, so it is positive to see recent decreases. I expect net debt will fall further if profits can increase as well.
But this does not mean I am rushing to buy BAE. In fact, I have sold a large chunk of my stake. This is because I hope that there will be a ceasefire at some point in the near future, and global geopolitical tensions can cool down. This would not benefit the BAE share price, and therefore, it is not a stock I wish to hold in my portfolio. It also means that BAE may have already reached its peak. Accordingly, I prefer several other FTSE 100 stocks that have been beaten down recently yet look very capable of a strong recovery.
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Stuart Blair owns shares 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.