In the last 10 months, the BAE Systems plc (LON:BA) (BA.L) share price has risen by around 15%. That’s a strong performance in my view, with investor sentiment towards the defence sector having the potential to improve further over the medium term.
One reason for this could be the potential for rising defence budgets across the global economy. Rising GDP growth across the world could lead to higher spending after a period of austerity and cutbacks across much of the developed world.
In addition, a number of NATO members are set to increase the proportion of GDP that they spend on defence. They have agreed to raise it to 2%, and this policy looks set to be put into action over the medium term. The US, as the world’s biggest spender on defence, may also look to increase its defence budget from the current 3.1% of GDP, with President Trump apparently keen on the idea.
With BAE therefore having what seems to be a strong operating environment, the company may benefit from a tailwind in the medium term. This could boost its stock price and lead to impressive returns for its investors.
Additionally, the company seems to offer good value for money at the moment. It has a PEG ratio of around 1.6, which suggests that it offers a margin of safety even after its rise in the last 10 months.
BAE also has a relatively solid balance sheet and sound strategy in my view. It has a strong position in a number of key markets which could yield impressive growth over the coming years. This could act as a catalyst on its bottom line and lead to stronger performance than a number of its sector peers.
As a result, I’m upbeat about its prospects from an investment perspective and feel it could outperform the FTSE 100.