When Should You Buy BAE Systems plc (LON:BA.)?

Today we're going to take a look at the well-established BAE Systems plc (LON:BA.). The company's stock saw a significant share price rise of over 20% in the past couple of months on the LSE. With many analysts covering the large-cap stock, we may expect any price-sensitive announcements have already been factored into the stock’s share price. However, what if the stock is still a bargain? Let’s examine BAE Systems’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.

Check out our latest analysis for BAE Systems

Is BAE Systems still cheap?

Good news, investors! BAE Systems is still a bargain right now according to my price multiple model, which compares the company's price-to-earnings ratio to the industry average. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that BAE Systems’s ratio of 11.67x is below its peer average of 19.66x, which indicates the stock is trading at a lower price compared to the Aerospace & Defense industry. Another thing to keep in mind is that BAE Systems’s share price is quite stable relative to the rest of the market, as indicated by its low beta. This means that if you believe the current share price should move towards its industry peers, a low beta could suggest it is not likely to reach that level anytime soon, and once it’s there, it may be hard to fall back down into an attractive buying range again.

Can we expect growth from BAE Systems?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. However, with a negative profit growth of -6.5% expected over the next couple of years, near-term growth certainly doesn’t appear to be a driver for a buy decision for BAE Systems. This certainty tips the risk-return scale towards higher risk.

What this means for you:

Are you a shareholder? Although BA. is currently trading below the industry PE ratio, the negative profit outlook does bring on some uncertainty, which equates to higher risk. Consider whether you want to increase your portfolio exposure to BA., or whether diversifying into another stock may be a better move for your total risk and return.

Are you a potential investor? If you’ve been keeping tabs on BA. for some time, but hesitant on making the leap, I recommend you dig deeper into the stock. Given its current price multiple, now is a great time to make a decision. But keep in mind the risks that come with negative growth prospects in the future.

If you'd like to know more about BAE Systems as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 1 warning sign for BAE Systems you should be aware of.

If you are no longer interested in BAE Systems, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.