The previous few years have been sturdy ones for the BAE Methods (LSE: BA) funding case. Throughout that interval, BAE Methods shares have risen 160%.

Final yr noticed file turnover, whereas income reached virtually £2bn. For a corporation with a market capitalisation of beneath £40bn that appears pretty spectacular to me.

It additionally signifies that the shares commerce on a price-to-earnings (P/E) ratio of 20. That’s on the excessive finish of the valuation vary I’d usually take into account for a corporation in a mature trade, but when the enterprise is excessive sufficient high quality I’d take into account it.

Sturdy enterprise prospects

The wind has been within the aerospace and defence contractor’s wings for the previous a number of years. From a rebound in demand for civil aviation to surging demand for defence and warmongering gear from all kinds of governments worldwide, BAE and lots of of its friends have been in clover.

The corporate’s gross sales final yr rose 9%, free money flows surged 33%, and primary earnings per share had been up a fifth. That efficiency meant the corporate felt assured to spice up its dividend per share by 11%. Given the share price has risen quicker than that, although, the yield is now 2.3%. That’s cheap in my opinion however not notably thrilling and is nicely beneath the present FTSE 100 common.

The corporate’s order consumption final yr barely grew however was nonetheless a formidable £38bn. That meant the order backlog grew £11bn to £70bn.

There’s loads for the agency’s employees to be getting on with for now. It sees sturdy ongoing progress prospects and grew its workforce by over 6,000 final yr.

That is an trade constructed on proprietary expertise and sometimes advanced long-term relationships, with few or no rivals for lots of what the enterprise does. That bodes nicely not just for future demand but in addition for ongoing profitability.

Shares look moderately priced

What concerning the price outlook for BAE Methods shares?

Though the P/E ratio shouldn’t be low cost, it strikes me as cheap. Given the order e book and ongoing sturdy buyer demand, I feel the corporate can seemingly develop income over the following few years. That will imply the possible P/E ratio is decrease. If that involves go, I count on the shares may transfer up additional.

However sooner or later, that demand could shift. As we noticed in the course of the pandemic (extra clearly with Rolls-Royce, but in addition with BAE Methods), demand from civil aviation prospects can transfer round considerably.

Army spending is powerful for now and appears set to remain that approach for the medium time period, in my opinion. However as soon as European armed forces rebuild their beforehand depleted gear ranges, demand may drop again nearer to the place it stood a couple of years in the past.

The order backlog additionally bothers me. Sure, BAE Methods is promoting its merchandise so successfully. However a big order e book brings the danger of pricey delays in supply.

Critically, I don’t just like the enterprise BAE Methods is in. Every investor has their very own moral benchmark and whereas cigarettes go mine, international navy gear gross sales don’t. So, I’ve no plans so as to add BAE Methods shares to my portfolio.