Where’s the BAE share price headed after deal-making?

The BAE Systems share price has been on the decline since the start of May. That comes despite the UK arms manufacturer having landed a number of lucrative contracts, with the government upping defence spend. The company has now announced that it will open an office in Ukraine as a precursor to manufacturing in the country.

• The BAE Systems share price is down almost 8% since 3 May 2023.
• The UK-based arms manufacturer is in talks to start arms production in Ukraine.
• Operating profit expected to grow 4-6% this year, but guidance unchanged in recent update.

The BAE Systems [BA.L] share price had lifted off last year due to increased defence spending. Fuelled by the outbreak of war in Ukraine and a series of high-profile deals, BAE’s stock has climbed more than 21% over the past 12 months.

Year-to-date BAE’s share price is up almost 10%, closing Friday 9 June at 940p. However, that’s some way down on the stock’s 1,032p close on 25 April. Could this be a buying opportunity, considering governments are still spending big on defence?

BAE to work with Ukrainian government

BAE is in talks with Ukraine to open a weapons production system in the country. Senior executives met with Ukrainian president Volodymyr Zelenskyy at the end of May to discuss the possibility of a base to produce and repair armaments, from tanks to artillery. As a precursor BAE will open an office in the country.

“ We agreed to start work on opening a BAE Systems office in Ukraine, and subsequently repair and production facilities for the company’s products,” Zelenskyy said on Telegram.

BAE Systems has benefitted indirectly from the war in the Ukraine, as governments rush to bolster their military capabilities. CEO Charles Woodburn has described the company as operating in an “elevated global threat environment”.

That environment led to £37bn-worth of orders in 2022, up £15.6m on the previous year. Sales rose 4% year-on-year last year to come in at £23.3bn. Underlying earnings rose 9% to 55.5p per share.

In November, BAE Systems nabbed a £4.2bn contract to build Royal Navy ships. More recently, the Czech Republic has finalised a £1.6bn contract with BAE’s Swedish subsidiary and the Swedish government to procure 246 CV90 MkIV infantry fighting vehicles, while last week BAE secured a £270m Royal Navy radar contract.

Full-year guidance remains unchanged

In a trading update published 4 May, BAE Systems said that full-year guidance remained unchanged. Sales are expected to grow between 3-5% this year, with operating profit up 4-6%. CEO Charles Woodburn said that “order flow on new programmes, renewals and progress on our opportunity pipeline remains strong”, adding that in the current environment BAE’s portfolio of products provided visibility for top-line growth, margin expansion and cash generation.

The lack of surprises in the statement seems to have left investors underwhelmed, with BAE shares dropping 5.4% since 4 May. News of the partnership with the Ukraine government hasn’t produced much lift in the stock either, which is down 1.1% since 30 May.

Where next for BAE shares?

Despite a lacklustre performance over the past month, BAE Systems share price got a bump on 1 June after the company launched the third tranche of its share buyback scheme. First announced in July last year, BAE aims to buy £1.5bn in its own shares in three tranches of £500m. BAE Systems stock closed the day at 944.8p, having opened at 931p.

Longer-term, BAE Systems stock could continue to benefit from a strong pipeline of orders and increased defence spending due to global tensions. Should interim results exceed expectations when they are published on 2 August then BAE shares could once again rise.

One blemish, however, comes from an investigation by India’s domestic crime agency against BAE Systems and Rolls-Royce [RR.L]. The Central Bureau of Investigation accuses the companies of engaging in corruption to “cheat” the Indian government over the manufacture of BAE’s Hawk aircraft, which uses Rolls-Royce engines. This revives historic allegations made by the UK’s Serious Fraud Office. Any fine — along with the negative press — could be a drag on the BAE share price.

BAE Systems share price has a 1,017p 12-month median target from analysts. Hitting this would see an 8.2% upside on Friday’s close.