Are the wheels starting to fall off for BAE Systems (LSE: BA.) shares? The share price had dropped 14% since an all-time high reached in March. Then a Q3 update from the firm preceded a 4% fall on 7 May. The total decline is desperately close to approaching ‘crash’ territory – usually considered to be a fall of 20% or more.
Question marks have remained for a long time about its pricey valuation. Now the premium on the FTSE 100 defence firm’s shares might be a step too far for budding investors. Maybe a price-to-earnings ratio of above 30 is simply too high for a British manufacturer? While I can’t speak for every investor everywhere, I can offer my own take on the subject.
Any worries?
The long and short of it is that no, I’m not worried at all. I have happily seen my stake in BAE Systems rise in recent years, and I’m not planning to sell at the first sign of trouble.
What do I make of the recent fall? It’s a fairly natural byproduct of an ongoing conflict and a capricious world leader. Defence stocks will always rise and fall based on such geopolitical events. And the ups and downs are intensified when the bloke in the White House changes his mind more often than I change my socks.
It’s also a reason many may wish to steer clear too. Defense stocks fall under the category of ‘sin stocks’ that are in sectors that some people might be uncomfortable with.
As for the Q3 update, the pullback came after investors were disappointed by the lack of upgrades to forward guidance. While that can be a short-term issue that justifies a sizeable drop in share price, it’s not something that will massively affect the stock long term.
Worth the price?
A would-be investor to BAE Systems is still staring at a mighty high valuation. When a firm trades at 30 times earnings, that often suggests a lot of growth is baked into the share price. Is that the case here?
I think so. The increase in government spending is starting to trickle in and the company has been slowly building its order backlog in recent years. I would say we’re still early in the game for NATO countries chucking more money into military budgets.
And BAE Systems is set to benefit because of the wide range of valuable products and services. Take the recent multi-million dollar contract to service the USS Iwo Jima at a shipyard in Norfolk, Virginia. The US is a notable big spender and is the firm’s biggest customer to boot.
While I could not blame anyone searching for cheaper-looking stocks at a time when many are trading at cut-price valuations, I think BAE Systems is still worth considering.
