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Whereas we have now seen loads of inventory market turbulence to this point this yr, one firm that has shrugged it off is BAE Methods (LSE: BA). The BAE share worth has soared 51% because the begin of 2025. Meaning the share has greater than tripled over the previous 5 years.
For the customarily staid-seeming defence sector, that could be very sturdy efficiency.
Can it proceed – and in that case, ought I to contemplate including the share to my portfolio?
BAE Methods has the wind in its sails
The defence atmosphere has modified considerably over the previous few years, main many European governments to spice up their budgets. That has been excellent news for defence contractors throughout the board, together with BAE Methods.
Final yr, for instance, the UK defence large reported a 14% development in revenues. In the meantime, internet revenue was up 5% and got here in not far under £2bn.
The corporate expects gross sales and underlying earnings per share to rise by mid single to low double percentages this yr.
A buoyant finish market may not all the time imply a discount
However whereas defence spending is stronger than earlier than, I do have some considerations.
Now we have seen up to now that when instances are sturdy, defence contractors can get gung ho making long-term offers that then grow to be costly for them to ship, as prices rise over time.
Checked out in that mild, I’ve combined views on BAE’s order backlog. It ended final yr at a document excessive of £78bn. That’s good because it reveals that the corporate has a number of work to maintain it totally occupied. Nevertheless it might additionally tie the corporate up for years to return and a few of these orders might change into much less worthwhile than they appear now when they’re lastly delivered.
On prime of that, BAE Methods has a robust world presence, together with within the US. Ongoing tariff uncertainty might distract administration consideration from development and it might additionally eat into the underside line.
Contemplating that, the present BAE share price-to-earnings ratio of 27 appears costly to me. I feel it affords an inadequate margin of security for me if even a few of these dangers come to cross.
Momentum might proceed
That doesn’t imply that the BAE share worth may not go larger from right here. The current momentum factors to the truth that many buyers are excited concerning the agency’s prospects. That might assist pushing the share worth up. An enormous contract win or different constructive information might additionally enhance the share worth.
However as an investor, I’m focussed on fundamentals not momentum. Based mostly on what we at present know concerning the agency’s business outlook, I feel the share worth is dear. I’ve no plans to take a position.
