Down 5%, BAE Systems share price looks like a bargain to me as big orders continue to flow in

BAE Systems» (LSE:BA) share price is down 5% from its October 17 12-month high of £14.14.

I attribute this to profit taking. Shares of the defense giant have risen 120% since Russia’s invasion of Ukraine in 2022.

I think the decline provides a rare opportunity to buy stocks at a discounted level.

A growing order book

The first half of this year saw a £1.6 billion increase in BAE Systems’ order book compared to the second half of 2023, reaching £59.6 billion. During the same six-month period, its order book increased by £4.3 billion, to £74.1 billion.

In fact, barely a week goes by without major new orders being announced and the month of October was no exception. The US Navy awarded it a $92m (£71m) submarine contract. It then received a $184 million order from the US Army for multi-purpose armored vehicles. And in the middle of the month, the US Army awarded it a $460 million contract to modernize its air fleet.

Then news arrived of a possible project to supply Turkey with Eurofighters. These are built by a consortium of BAE Systems, Airbus And Leonard.

It also followed a U.S. State Department announcement earlier this month authorizing military equipment sales to Italy, India and Romania. The combined value would be $965 million, with BAE Systems being the lead contractor for Italian sales.

The risk here is that a failure of one of its main products would be costly to remedy. It could also damage its reputation.

However, as things stand, analysts expect the company’s profits to grow 7.3% annually through the end of 2026.

Growing global insecurity

Tit-for-tat attacks between Israel and Iran (and its proxies) raise the prospect of a broader war in the Middle East.

Russia has been planning a gradual expansion further west into Europe since it invaded Georgia in 2008. And I believe it will continue to threaten other countries’ borders, regardless of events in Ukraine.

Additionally, CIA Director William Burns claimed last February that Chinese President Xi Jinping had ordered his military to prepare to invade Taiwan by 2027.

Few people want wars. However, Western leaders appear to believe that the best way to ensure peace is to prepare for conflict.

NATO members have committed to increasing their annual defense spending to more than 2% of gross domestic product. And it is estimated they will need to spend €1.8 trillion (£1.5 trillion) to make up for 30 years of underinvestment.

As the largest defense contractor in Europe and seventh largest in the world, BAE Systems stands to benefit.

Are stocks undervalued?

BAE Systems is currently trading on the key market valuation price-to-earnings (P/E) ratio at just 21.6. That seems like a bargain compared to its peer group’s average P/E of 46.1.

The same goes for its price-to-sales (P/S) ratio of 1.1 versus its peer group average of 4.4.

To determine how cheap it is in terms of cash flow, I performed a discounted cash flow analysis.

This shows that BAE Systems shares are undervalued by 21% at their current price of £13.40. Their fair value would therefore be £16.96, although they could be lower or higher than this.

Given this and the company’s tremendous growth prospects, I will be buying more shares very soon.