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Global stock markets are selling off again as investor tension ramps up. But the BAE Systems (LSE:BA.) share price has gained value as investors are piling into safe-haven assets.
The defence contractor is in fact just one of seven risers on the FTSE 100 on Wednesday. Defence budgets remains largely unchanged regardless of broader economic conditions. This gives the company exceptional earnings visibility, making it a popular buy in uncertain times.
In fact, spending on weapons is especially robust in the current climate, as BAE’s excellent first-half financials released today illustrate. Here’s why I think it’s one of the best FTSE index shares to buy .
Record order backlog
Sales at BAE Systems rose 11% to £12bn between January and June, today’s update shows, while the firm’s order backlog stood at a record £66.2bn at the end of the period. The company booked a whopping £21.1bn worth of orders in the first half.
Pre-tax profit leapt 54% year on year, to £1.2bn.
The FTSE company is thriving as an increasingly fragile geopolitical landscape prompts a new global arms race. Demand for its hardware has been especially high following Russia’s invasion of Ukraine early last year.
Upgraded forecasts
In fact, BAE Systems today upgraded its full-year forecasts following that recent strong trading. It now expects sales to grow between 5% and 7% in 2023, up from a previous estimate of 3% to 5%.
Underlying EBIT growth estimates have also been upgraded by 200 basis points, to 6%-8%. And free cash flow is now tipped to come in above £1.8bn, £600m more than the firm predicted back in March.
Pleasingly the weapons manufacturer is returning tonnes of cash to its shareholders following recent strong performances. It raised the interim dividend by 11% to 11.5p, and announced a further £1.5bn share buyback programme.
A top long-term buy
Thanks to its market-leading technologies and wide geographic footprint, BAE Systems is enjoying strong trade across the globe. It’s not just winning lots of business from its traditional US and UK customers, with whom it has enjoyed top-tier supplier status for decades.
In the first half it enjoyed a bumper £1.8bn contract with the Czech Republic to supply CV90 infantry fighting vehicles. It also agreed to supply Saudi Arabia with support for their Typhoon fighter planes to 2027, and pledged to help Australia acquire its first nuclear submarines.
This large and growing customer base not only reduces risk. It also gives the company improving exposure to fast-growing emerging markets where defence spending is galloping higher.
BAE has opened new facilities in New Hampshire, Texas, and Iowa to help it meet soaring demand for its hardware. Analyst Andy Chambers, head of industrials at Edison Group, believes this points to a bright future for the company. He notes that
“this bold strategy of expansion also hints at the BAE Systems’ long-term outlook – the company clearly expects a permanently scaled-up demand for armaments in an increasingly uncertain world”.
There’s no such thing as a perfect share. In the case of BAE, lumpy contract timings for major deals can impact earnings from year to year. Trouble with project development, along with hardware failure in the field, can also adversely impact profits.
But on balance, I think the FTSE firm is a great share to buy right now.
