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Will defence be an engine of future growth for the BAE share price?

BAE share price: Fighter jets

The conflict in Ukraine has shone a spotlight on the need for countries to boost defence and national security spending, which is expected to be a tailwind for the BAE Systems [BA.L] share price.  

In April, the UK arms company announced it had been awarded a $2.8m contract from the US Air Force Research Laboratory (AFRL) to “develop a new approach to defeat adversaries, by overwhelming them with complexity”, according to a press release. The contract builds on an existing relationship BAE has with AFRL.

In 2017, it was awarded a five-year contract worth up to $49m to help customers safeguard the sharing of sensitive data and information between government networks. While these numbers are just a fraction of what BAE generates, they highlight the strategic role the company can play in supporting countries to shore up defences and national security. 

Ukraine conflict coincides with BAE stock rise  

During the coronavirus pandemic, the company’s commercial product segment took a hit as air travel screeched to a halt. The situation started to improve in fiscal 2021 and in the 12 months to the end of December 2021, the company posted revenue of £21.3bn, up 5% year-on-year. 

Revenue growth was driven by the government and defence-facing business units, the company noted in its full-year earnings report. The US, which has the world’s largest defence budget, accounts for 46% of all revenues.

The conflict in Ukraine has been good news for the BAE share price. Since Russian president Vladamir Putin ordered troops into the country’s breakaway regions on 22 February, under the guise of peacekeeping, through to the close on 29 April, the BAE share price has climbed 27.3%. The ETFMG Prime Cyber Security ETF [HACK], which has the stock as its third-biggest holding as of 3 May, is down 1.6% in the same period.

Acquisitions lift defence and security business

Hargreaves Lansdown researchers expect BAE’s position as a “critical defence supplier” to continue to hold it in good stead. “Reliable revenue streams are a very enviable asset in the current environment, and we also note the valuation isn't too demanding. The group's in good shape to deliver on its long-term growth strategy,” the analysts wrote in a note following the annual earnings.

“The reliable revenue streams that carried BAE through the pandemic meant the firm could focus on future growth rather than survival.”

In 2020, the company completed the purchase of Raytheon’s [RTX] airborne tactical radio business, paying $275m. It also stumped up $1.9bn for a military GPS business from Collins Aerospace. The two were offloaded following Raytheon’s merger with Collins Aerospace’s parent company, United Technologies. 

In March this year, it completed the $200m acquisition of Bohemia Interactive Simulations, which specialises in software solutions for military simulation training. Future acquisitions could be on the cards, especially in the cybersecurity and intelligence space, which is becoming an increasingly important engine for driving growth.

Macroeconomic tensions raise prospects

“Our defence and security capabilities remain highly relevant in an uncertain global environment with complex threats, the requirement in many cases to recapitalise or upgrade ageing equipment, and with the additional need for governments to drive a domestic economic prosperity agenda in a post-pandemic world,” the company said in February.  

“This backdrop has resulted in good prospects in existing and new international markets for our products and services in air, maritime, land, space and cybersecurity.”

Analysts are generally bullish on BAE. The stock has five 'buy' ratings and two 'hold' ratings, according to MarketBeat data. The consensus price target is 786.33p, implying an upside of 6.3% on its 29 April closing price of 740p. 

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