Could the BAE Systems share price be about to collapse?

Asian man looking concerned while studying paperwork at his desk in an office

BAE Systems‘ (LSE:BA.) share price has started moving in the wrong direction for shareholders.

It’s down around 8% over the last month, representing one of the biggest pull backs since Putin’s war in Ukraine began. The stock’s up 152% over three years.

The question is, has BAE Systems extended too high? Is this trickle going to become a flood of capital leaving?

Close to its target price

The average share price target for BAE Systems is £14.16. That’s base on 18 analysts and it suggests the FTSE 100 stock’s actually trading at a 7.3% discount.

Among the 18 analysts, seven recommend ‘buy,’ three target ‘outperform,’ seven say ‘hold,’ and one forecasts ‘underperform’.

While this suggests some optimism, it’s actually quite rare for good UK companies to trade this close to their share price targets.

I’d also caution that analysts can be very wrong. I mostly trust the consensus, but some analysts from major institutions have poor records.

Not overly cheap

I’m aware that many UK-focused investors would baulk at a stock trading at 20.6 times forward earnings. However, that shouldn’t be a concern if earnings are growing at the requisite rate.

The price-to-earnings (P/E) ratio falls to 18.3 times in 2025 and 16.6 times in 2026, highlighting that analysts expect earnings to move in the right direction.

However, in my opinion, these figures don’t suggest earnings are growing fast enough.

My calculations suggest that earnings are growing by around 10.5% annually, and this gives us a price-to-earnings-to-growth (PEG) ratio above two.

Normally, a PEG ratio under or around one is a sign of a good value stock. So BAE’s looking a little expensive, especially on this medium-term metric.

Even when factoring in the 2.3% dividend yield, it doesn’t make me want to buy the stock.

It’s a long-term investment

Near- and medium-term metrics are always useful, but it’s arguably less so for companies like BAE which work on multi-year, even decade-long, programmes like AUKUS.

Instead, more emphasis should be placed on new long-term indicators such as new contracts, project milestones, technological advancements, and strategic alignment.

BAE Systems is poised to secure several significant new contracts in 2024. Potential contracts include additional work on the AUKUS programme, the UK’s Tempest future combat air system, and upgrades for the US Air Force’s intercontinental ballistic missiles.

Of course, there’s a host of smaller and less high-profile projects that may even be more lucrative for BAE.

Moreover, within the current geopolitical context — warring Russia, assertive China, and a hot Middle East — governments around the world are committing to increased defence budgets and new long-term programmes.

This is the ideal scenario for BAE.

The bottom line

Analysts suggest there’s not much room for the share price to grow, and the metrics support that. However, there are long-term drivers at play here. It’s not just about the next three years.

My hunch is that BAE’s priced fairly at the moment. Nonetheless, geopolitical developments will continue to dictate share price near-term movements.

I’m not expecting the stock to collapse.

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James Fox has no position in any of the shares mentioned. The Motley Fool UK has recommended BAE Systems. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.