BAE Systems (LSE: BA) shares have really woken up over the past couple of weeks. With countries around the world hiking their military spending, it is easy to see why investors are buying into this sleeping giant.
However, I do not want to buy a stock based purely on the impact of what is clearly a human tragedy unfolding in Europe. I have actually been a supporter of the business for a long time. I have been attracted to the company’s long contracts with customers and its portfolio of unique technologies. These qualities could act as a competitive advantage.
I think it is more important to focus on these advantages rather than short-term issues. And as long as they are in place, I believe the company remains an attractive opportunity. I would be happy to add it to my portfolio.
The outlook for BAE Systems shares
The news that countries around the world are starting to increase their military spending is good news for defence contractors like BAE Systems.
But these commitments tend to be influenced by politics, making them quite unpredictable. There is no telling what will happen over the next couple of years and if these commitments will remain in place.
So instead of focusing on short-term developments, I focus on a company’s existing strengths. In the case of BAE Systems shares, this means the quality of the firm’s technology and existing contracts with clients.
BAE is one of the largest defence contractors in the world, with one of the largest portfolios of defence technology. It is a primary supplier for the Ministry of Defence, and the government owns a golden share in the business. This effectively gives it the ability to veto any corporate actions it does not agree with.
Competitive edge over peers
BAE’s prominence in the UK defence market gives it an edge over other global competitors when bidding for contracts. The company has a global client base supplying militaries all over the world from the Middle East to Australia. The corporation also has a growing cyber security and intelligence business. This arm should help future-proof the enterprise as emerging threats in the cybersecurity space become more of an issue.
Despite these attractive qualities, the corporation is exposed to some unique risks. The global defence industry is highly regulated and controlled. BAE needs to stay on the right side of regulators to maintain its presence in the market. If it falls foul of these rules, it could be cut off from its customers. At the same time, this market is quite competitive. The group has an edge over some of its peers, but it has to work flat out to maintain this advantage.
Even after taking these risk factors into account, I think the company’s desirable qualities make BAE Systems shares a desirable addition to my portfolio. These qualities coupled with rising military spending around the world could help the stock outperform the market over the next few years.
Rupert Hargreaves has no position in any of the shares mentioned. 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.
