Although BAE Systems (BAESY), a huge defense contractor, is based in the UK, it has a very large U.S.-based subsidiary, called BAE Systems, Inc. BAE Systems’ stock trades in the U.S. on an over-the-counter exchange under the symbol “BAESY”. Meanwhile, the company reported very strong financial results in the first half of 2024, while its valuation is rather low, given its strong growth. Moreover, the firm’s European business could get a big boost from the Trump administration’s policies.
A Look at BAE’s U.S. Subsidiary
BAE Systems, Inc. has almost 41,000 employees “across its major operations in the United States, United Kingdom, and Sweden,” the firm reported. Its Electronic Systems unit develops “commercial and defense electronics” for a wide range of uses, including aircraft, intelligence operations, and “power and energy management.”
Also notable is the subsidiary’s products under the heading of Intelligence and Security. These offerings are deployed in all conceivable frontiers, including air, sea, land, space, and cyber. Its Platform & Services unit makes large armaments, such as “armored combat vehicles,” “naval guns,” artillery, and “missile launching systems.”
Finally, its Space & Mission Systems division provides products that enable effective penetration of the final frontier, including “signal processing algorithms,” “radiation-hardened electronics,” advanced sensors, and equipment that is used to help protect assets in space.
Strong First-Half Results and a Low Valuation
In the first half of 2024, the revenue of all of BAE Systems plc i.e. the entire company, jumped 13% versus the same period a year earlier to 13.4 billion British pounds. Further, its “underlying” earnings before interest and taxes (EBIT) also advanced 13% year-over-year, rising to 1.39 billion British pounds. Finally, during the second half of 2024, the company’s order backlog rose by 4.3 billion pounds to 74.1 billion pounds.
On the valuation front, the shares change hands at a forward price-to-earnings ratio of 17 times. Other large defense contractors that are growing significantly more slowly than BAE Systems trade at similar valuations, making BAESY stock appear to be attractive at its current levels.
Trump’s Policies Could Boost BAE Systems
After Trump frequently called on European countries to spend more on their militaries in his first term, he recently pushed for NATO members to spend up to 5% of their GDP on defense. Also, the organization’s secretary general, Mark Rutte, earlier this month stated that it would have to increase its target above 3% of GDP. At this point, one-third of all NATO members have not yet met the organization’s current target of spending 2% of GDP on their militaries.
Indicating that European defense spending is generally likely headed higher, German opposition leader Friedrich Merz, viewed as likely to become the nation’s next leader, earlier this month committed to raising the country’s military spending to 2% of its GDP. BAE Systems is likely well-positioned to benefit from higher military spending by European NATO members because the firm says that it has “a vital role in providing the capabilities for the defense of Europe and NATO.” The company noted that over 25 of the continent’s countries use its products and/or services.
