BAE Systems (LSE:BA.), like other major defence shares, tend to enjoy stable earnings from year to year. It reflects the reliable nature of arms spending which remains unaffected by wider economic conditions.
The outlook for these companies has improved significantly since 2022. And for BAE, City analysts expect earnings growth to speed up to double-digit territory beyond this year.
If it can hit (or exceed) these bright targets, BAE Systems — whose share price has risen 51% in the past two years — could continue to soar in value.
The key question, naturally, is how realistic these earnings forecasts are. It’s common for corporate earnings to either surpass or undershoot analysts’ predictions.
So can the FTSE 100 company really meet those broker estimates? And should I buy BAE shares for my portfolio?
Market pick-up
As mentioned before, the defence sector has witnessed a bump in the last couple of years. Russia’s invasion of Ukraine has ignited fears of a fresh Cold War, thus prompting countries across NATO to rapidly rearm.
War in Eastern Europe isn’t the only driver behind rejuvenated arms spending though. Concerns over Chinese expansionism in Asia, fresh hostilities in the Middle East, and the ongoing fight against terrorism also mean defence budgets are growing.
Worldwide defence spending soared almost 7% in real terms in 2023, according to the Stockholm International Peace Research Institute (SIPRI), to new peaks above $2.4trn.
Demand jump
BAE Systems is a critical hardware and services supplier to both the US and UK. And so it’s in one of the box seats to capitalise on this industry upswing.
Both sales and underlying earnings rose an impressive 13% in the six months to June. And encouragingly, the firm’s order backlog also rose to a record £74.1bn in the period. This provides it with solid earnings visibility.
Looking ahead, submarine builder BAE also stands to be one of the big winners as the UK upgrades its nuclear deterrent. It plans to double capacity at its main boatbuilding site in Barrow in Furness to capitalise on this opportunity too.
Possible threat
Like any company however, BAE Systems faces threats that could hit earnings forecasts. In this case, I’m especially concerned by its ability to meet orders if part sourcing remains problematic.
BAE said it “continues to work with, and support, its supply chain to actively address the risk of disruption” in its half-year update. But sector peer Senior‘s October profit warning underlines the scale of the difficulties aerospace and defence companies face.
The verdict
That said, I believe that on balance BAE Systems’ shares are highly attractive right now. I expect defence spending to rise steadily over the next decade, underpinning robust earnings growth for the FTSE 100 firm.
I’m considering adding it to my own portfolio when I next have cash to invest.
This post was originally published on Motley Fool
