Are BAE Systems shares worth buying today?

BAE system (LSE: BA.) Shares have been a great investment. Over the past year, they have increased by around 31%. Over the past two years, they have risen about 90%.

Is the stock worth buying today? Let’s have a look.

Healthy growth

BAE Systems’ new 2022 results show the defense company now has considerable momentum.

Driven by a heightened threat environment, sales rose 4.4% year-on-year to £23.3bn. Meanwhile, underlying earnings per share (EPS) rose 9.5% to 55.5p (versus the consensus forecast of 53.9p).

On the back of this solid performance, the group lifted its full-year dividend by a healthy 7.6% to 27p per share (giving it a trailing yield of around 3% at current share prices).

It also bought back around £0.8bn worth of its own shares during the year. Buybacks tend to boost earnings per share, over time.

Looking ahead, management is confident about the future, citing a record order book of £37.1bn, which has pushed the order backlog to £58.9bn.

“Record orders and financial performance give us the confidence to deliver long-term growth and continue to invest in technology, facilities, and thousands of skilled jobs, and increase shareholder returns.” said CEO Charles Woodburn.

Group finance director Brad Greve added: “For 2023, we predict higher growth, continuous margin expansion, higher EPS and we also increase our continuous three-year cash target, all of which indicate that our business is growing momentum for the future.e.”

As for the company’s balance sheet, this is good at the end of 2022. Cash on hand is £3.1 billion while net debt (excluding lease obligations) is £2 billion. And the pension position, which was in deficit for the year, is in surplus accounting, thanks to higher interest rates.

Overall, the 2022 results and 2023 outlook are quite encouraging, in my mind. Top and bottom line growth, a solid dividend increase, and stock buybacks are exactly what I want if I want to buy these stocks.

Evaluation

But what about valuation? Is there still room for stock prices after recent gains? Well, BAE Systems expects 5-7% revenue growth this year. Taking this midpoint (6%) and applying last year’s EPS figure, we get a 2023 EPS forecast of 58.3p.

This means that at the current share price, the expected price-to-earnings (P/E) ratio here is about 15.6.

At this price, I don’t expect to see huge gains in the short to medium term. However, I think the stock could deliver solid returns in the long run, if dividends are accounted for.

It is worth pointing out, however, that the analysts Jefferies recently raised its price target on the stock to 1,060p from 1,000p. So they can clearly see the potential for profit in the near term.

Of course, for BAE Systems stock to continue to perform, the government will need to continue spending on defense. I think we will in the years to come, because of what’s going on in the world.

However, we cannot rule out a pullback in defense spending at some stage. This scenario could result in lower returns for investors in BAE.

So, as always, diversification is a good idea. If I were to buy shares of BAE Systems today, I would also buy more shares to manage risk.