Aerospace and defense manufacturer BAE Systems (LON:BA), saw its shares rise on Friday after the government announced it had announced a £16.5 billion injection into its defense budget.
In effect, boosting the defense budget actually increases by £7 billion (according to IFS’ Benzalanco), but that amount certainly matters. And for Prime Minister Boris Johnson, new money will protect “hunds of thousands of jobs,” creating 40,000 new jobs, allowing Britain’s defensive capabilities to be “a generation modernised.”
Some criticize the new funding because green finance and the Covid Support scheme deserve more attention, but the Department of Labor and Treasury has focused more on budget impact, with the former supporting an increase in defense budgets, but asking where the money came from.
Speaking about the decision to expand defence spending, Prime Minister Boris Johnson has pledged to protect the shipping lanes that supply the UK, renew the country’s nuclear deterrent power and restore its status as “European naval power” in the UK’s British shipbuilding renaissance.
He added that new “Cyberforce”, AI centers and RAF space commands need to be created. “From aerospace to self-driving cars, these technologies open up 10,000 jobs each year, creating a total of 40,000 jobs, and collecting them across our country,” he added.
The BAE system is booming and lively
Since the beginning of the month, BAE Systems shares have skyrocketed over 20% following solid orders over the past few months, with the announcement of a new contract for the supply of Eurofighter jets to the German government, and now the announcement of additional defence funds from the UK government.
From the beginning of the week, the company’s shares have gone from just 470p to over 525p, exceeding 470p per share. Analysts currently have a consensus “purchase” rating on equities. This is more than 20% ahead of the current price, along with a target price of over 620p.
Its P/E ratio offers good value at 13.05, while the industrial sector averages at 35.04, while the MarketBeat community has a “underperformance” rating of just 50.19% of the stock price.
The problem is: Will it continue to skyrocket or is the price of the rising? Well, there is a range of new orders that will give a push to the company’s prices, as the UK represents 20% of orders in the BAE system and an extra £4 billion a year on defence spending over the next four years.
Similarly, as stated by Yahoo Finance and Motley Fool’s Edward Sheldon, Joe Biden is also hoping to modernize the US defense capabilities. In his September speech, the presidential election said:
He wants to shift investment from “unrelated legacy systems” to “smart investments in technology and innovation, such as cyber, space, unmanned systems, artificial intelligence, and more.”
“We have to focus on unmanned capabilities, cyber and that, in a very modern world that is changing rapidly.”
With the US accounting for 43% of orders for BAE systems, such a move could be long-term, if proven, important to the long-term outlook.
Similarly, current prices aren’t far ahead where they spent most of the previous year, and the 2021 revenue forecast of 48.9pa stocks generates an attractive P/E ratio of around 10.5 at this price.
For those who are not enthusiastic about the reality of the company’s Saudi contract, a 5% dividend yield and a “substantially undervalued” memo from Morgan Stanley could make the BAE system a valuable opportunity for money.
