If I’d invested £1,000 in BAE Systems shares 1 year ago, here’s how much I’d have now!

I always look for companies with strong fundamentals in a sector that look like they can outperform the wider market. So, share it BAE system (LSE: BA) has come on my radar.

2022 is a difficult year to predict in the stock market. With so many ‘once in a generation’ happenings, it feels like every month there’s an event that rewrites the book on what to have.

Of course, no event was more shocking than the invasion of Ukraine by Russian forces, sending oil prices and other commodity prices soaring. This led to inflation, which the central bank is still struggling to control.

Countries then try to strengthen their defense capabilities, which leads to a surge in the performance of companies working in the defense sector.

BAE systems operate in various areas:

• Electronic Systems: navigation, control, guidance and communication systems;
• Cyber ​​​​& Intelligence: modernization of vehicles, systems, and cyber security;
• Platforms & Services (US): combat vehicles, weapons, and ammunition;
• Air: fighter and jet production and support;
• Maritime: submarines, torpedoes, radars, and naval gun systems.

How will it perform in 2022?

At FTSE 100 the company sees an incredible 54% rise in 2022. Earnings have risen 13.9% annually in the last five years.

If I had invested £1,000 in BAE Systems shares this time last year, I would have had a 40% return. There is also a huge dividend of 4.5% in 2022, which will give a total of £1,445.

It produced hardly any surprise that Britain’s biggest defense company was in a “high threat environment”. It has a strong order book for 2023 as national and international defense spending continues to grow.

What’s next?

The main issues affecting the sector in 2022 seem to be diminishing. Like most companies, it is dealing with supply chain constraints, uncertainty around Covid, and rising prices.

Going forward, the company appears to be in a healthy position. It has strong fundamentals, experienced management, and trades slightly below the sector’s average price-to-earnings (P/E) ratio of 18.7.

When looking at the company’s future earnings, it seems that much of the future growth has been priced into the stock price. Using discounted cash flow calculations, the shares are worth 782p, about 7% below the current price of 837p.

This may be due to long timelines for product delivery, with recent contract awards as a major catalyst. However, one area that could offer new opportunities is the area of ​​cybersecurity, where recent hacks from various public and private sector companies indicate an increased risk. If the company can look to complement its manufacturing capabilities with software systems, the increased revenue that has not yet been priced can provide some excitement for new investors.

In this uncertain market, owning a strong and growing company with a reliable dividend of 3.3% is fair. However, at the current order book price, and the FTSE 100 average dividend yield of 3.5%, I would suggest that there are better offers elsewhere for my portfolio.