The BAE Systems [BA] share price has been flying high lately – the UK multinational defence, aerospace and security company’s stock has surged 21.34% since Russia began its invasion of Ukraine on 24 February, closing last week at 721.72p.
The Russia-Ukraine conflict has in turn boosted the wider defence sector, with shares of US defence contractors such as Lockheed Martin [LMT] also climbing higher.
BAE Systems’ share price has been on an uptrend for longer than just the last few weeks, though. The shares have risen 47.44% over the past 12 months, and 81.79% in less than 18 months, since plunging to 397p on 30 October 2020.
With the war’s effects likely to continue for the foreseeable future, the stock could be set for a period of growth, but how well is the company positioned to sustain a push higher?
Ongoing conflict underpins BAE Systems’ share price rise
As the largest arms contractor in Europe and with almost half of total sales in the US, it’s unsurprising there’s a close correlation between the company’s revenue and the US defence budget. The Motley Fool’s Stephen Wright notes that in the past five years, US military spending has increased by 15%, from around $634bn in 2015 to almost $731bn in 2021. BAE Systems’ revenue increased by over 10% in the same period, from £17.7bn to £19.5bn.
As well as the US defence budget rising, NATO partners have also been increasing their defence spending “in line with their commitments to allocating 2% of GDP to this area”, according to Wright. The current hostilities are only likely to lead to an increase in national defence budgets around the world, and that spend, particularly from the US defence budget, should boost BAE Systems’ share price prospects.
BAE Systems revenue 2021
Bohemia Interactive Simulations acquisition reinforces strategy
The company isn’t simply relying on defence budgets though, as it strives to remain at the forefront of the latest technological advances. Its recently completed acquisition of Bohemia Interactive Simulations (BISim) for $200m is a prime example of this digital transformation strategy.
“The addition of BISim to the BAE Systems team expands our modelling and simulation capabilities and solidifies our systems integration strategy,” said Tom Arseneault, BAE Systems president and CEO. He added: “With this acquisition, we are even better positioned to meet our customers’ evolving needs in the rapidly rising market for global military training, and deliver next-generation virtual systems to help our US military and its allies effectively prepare for future scenarios.”
According to the company, the global market for military training and simulation environments is expected to continue to grow, exceeding $11bn annually. BAE Systems is confident the acquisition will go a long way to fulfilling this growing demand in both military and civilian applications, while also boosting its ability to meet the US national defence strategy.
What’s next for BAE Systems’ share price?
With the BAE Systems share price benefiting from the current conflict, a much-hoped for ceasefire could knock the shares in the short term, potentially back to around the 600p level where it traded prior to Russia’s invasion.
In the longer term though, the outlook appears to be positive, with defence spending globally set to rise against the backdrop of the current conflict, and with the repercussions likely to be felt for a long time to come. BAE already has a dominant position in its space, and its “exposure to cybersecurity, artificial intelligence, and electronic warfare”, as highlighted by Wright, should mean its well-positioned to exploit future opportunities and developments.
With five 'buy' and two 'hold' ratings, analysts following the stock rate it an overall 'buy' according to MarketBeat. The average analyst consensus price target of 670.33p suggests a potential downside of 7.05% based on Friday’s 721.21p close, but it’s still well above the pre-conflict share price level.