It would take a braver person than me to bet against BAE Systems tomorrow when the company reports its full year results. For one, the likes of Goldman Sachs and Deutsche Bank have a buy recommendation for the stock; for another, the majority of analysts following the company expect BAE Systems stock to rise to above 650 pence in the next 12 months, up from 593 pence where it is trading today.

The news flow for BAE is largely positive, despite the fact that it is still struggling to close a large scale deal with Malaysia for the sale of its Typhoon fighter jets. A major tailwind for the company remains the political climate in the US. The Pentagon is already BAE’s biggest customer, and will become bigger still if the Trump administration increases its defence spending as planned.

BAE Systems stock – Middle East market proves volatile

The Middle East is proving a mixed bag because of friction between Saudi Arabia and Qatar. Saudi Arabia accounts for about 20% of BAE’s overall sales and has bought more than 70 Typhoons so far but it is holding back on signing a contract for a further 40 jets as BAE just agreed to sell Typhoons to Qatar in a deal worth £5 billion.

Overall, BAE undoubtedly remains in a strong position as it maintains its slot as the world’s third largest exporter of military equipment. Its sales in the first half of 2017 were £9.57 billion, a 4% increase on the same period in 2016. If growth was maintained at the same pace for the full year 2017 sales should be in the region of £19.8 billion.

And here comes the but…

In November BAE Systems stock dipped to 537 pence as Norway’s $1.1 trillion state sovereign wealth fund decided to sell its holding in the company and to ban it from being in its portfolio in the future. At the time the Norwegian state pension fund was the fifth largest institutional holder in the company holding over 55 million of BAE Systems stock. The decision was made on ethical grounds as Norway decided to pull out of investments in companies producing things such as coal, parts for nuclear weapons, and tobacco.

The Armchair Trader says:

While such concerns will have little effect on the views of large US investment funds, which hold the vast majority of the company’s stock, they are a reflection of a trend more visible in Europe and with a younger generation of investors. In Germany, Belgium, France and the more wealthier countries in the European Union the younger investors – now in their late twenties and thirties – are making social responsibility an issue for their investment and mirror the approach of Norway’s sovereign wealth fund. This will start reflecting on companies like BAE, not today and not tomorrow, but definitely in the longer run.

So while the stock is likely to be a buy in the short term, in the medium to long term caution might be a better course of action.


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Commodities and Shares Editor
21st February 2018
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