After a disappointing 2024, the BAE Programs (LSE: BA.) share price is rising at pace. 

The FTSE 100 defence producer’s shares have rocketed 28% within the final month and are up 23% over the previous yr. 

Buyers are piling in, buoyed by considerations over Russia’s ongoing conflict in Ukraine and Donald Trump’s radical shift of US overseas coverage,as he pressures European nations to ramp up their army spending.

European-listed defence contractors, together with BAE Programs, have been main beneficiaries however have they rallied too far, too quick?

What subsequent for this FTSE 100 inventory?

We’re seeing seismic modifications. Germany is now contemplating scrapping its self-imposed debt brake to fund a large-scale army rebuild. The UK can also be pushing for elevated defence spending, albeit at a extra modest stage.

That is occurring at a time when BAE Programs is already in an enviable place. Full-year outcomes, revealed on 19 February, confirmed gross sales soared 14% to £28.3bn in 2024. Underlying revenue grew by the same proportion to £3.02bn. 

Even higher, the corporate’s order backlog hit an all-time excessive of £77.8bn, up 11% yr on yr. That ought to present beautiful income visibility for years to return.

Buyers have been additionally handled to a ten% dividend hike. The trailing yield is a modest 2.1%, however could be a lot larger if the shares hadn’t grown so quick.

Nevertheless, there was a slight concern within the outcomes: free money circulate slipped by £88m to £2.51bn, which might be one thing to look at.

Regardless of BAE’s success, there are dangers. Whereas Europe is accelerating defence spending, Trump has signalled potential cuts to the US army. 

Provided that BAE generates round 45% of its revenues from the US, any shift in Pentagon spending might hit orders.

Additionally, whereas European governments have made formidable guarantees, following by is one other matter. 

The UK, for instance, has pledged solely a modest improve in defence spending and stays financially constrained. If financial circumstances worsen, finances priorities might shift away from army enlargement.

The P/E ratio is a little bit excessive

There’s additionally the wildcard issue of peace talks. If discussions across the hoped-for Russia-Ukraine ceasefire achieve traction, governments would possibly seize the chance to cut back spending.

The BAE Programs share price, which has surged on expectations of long-term conflict-driven demand, might slip if we see significant progress (though I don’t assume we’ll, a lot as we lengthy for it).

I’ve one other fear. The shares are a little bit costly with a price-to-earnings (P/E) ratio of greater than 23. Buyers are pricing in quite a lot of development right here.

Defence shares have traditionally been cyclical, and whereas the world is at present in a interval of heightened army funding, occasions can flip rapidly. Buyers contemplating shopping for BAE Programs at this time ought to proceed with warning. 

The basics are sturdy, the outlook promising and I nonetheless assume this can be a good long-term buy-and-hold. I’m simply anxious that at this time’s rally has already priced in a best-case situation. To be clear, I’ve completely no plans to promote my shares. I simply gained’t add to my place at at this time’s price.