BAE Systems, BA., Down 1% On Trading Statement – Expectations Met

BAE Systems (LON: BA.) shares are little changed on the release of a trading update. At which point we might wonder a little why the update but it’s because the AGM is today and so there will be discussion of them – so, release to the stock market first.

The actual numbers released are fair and pleasant enough but they’re very little different from what they were predicted to be back on Feb 24. Feb 24 being when BAE share started their climb from around £6 to the current around £7.50.

This being another episode of that grand lesson concerning share prices – it is new news that moves them, not things we already know. So, if an announcement is simply a confirmation of what has already been stated then we’d not expect any major price movement as a result.

This also explains why the varied contracts that are detailed in this report haven’t moved the BAE share price today. Because they’re all large contract awards that are material to the company and so have been announced previously. Material changes are announced when they happen, not saved up for trading statements.

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The big thing that needs to be understood though is what is politely called the “heightened threat environment”. This is events in Russia and Ukraine of course. It’s possible to be rather surprised that an arms manufacturer isn’t making excess profits when there’s such a “heightened threat environment”. The answer is that it might well do, well, could do, but it won’t be at present.

There is a great deal of fighting going on, much expenditure of ammunition and kit. But everything, but everything, is coming out of store at present. Noting is being newly manufactured to them be delivered to the front line. That’s just not the way that militaries work.

There is some certain amount of munitions, of kit, in stock. Large amounts for a well-prepared military. This is what is then expended in the early stages of any “threat environment”. That’s just the sensible way it all works for who wants to be running around signing contracts, awaiting manufacturing, when the need is for material right now?

If that environment then continues for many months then yes, there will be emergency contracts let out for more equipment. But what is more likely is that the stockpiles will be run down and then, in the fullness of time, contracts will be signed to restore them. Arms manufacture will rise in the future – but not at emergency prices and emergency profit margins. This is why BAE hasn’t soared, at least so far, on the back of that current environment.

The future for BAE depends not on current events but on future reactions to them. How much restocking will be done, how quickly, and how will military budgets increase in the future given the increase in perceived risks? It’s the answers to those political questions which will likely drive future BAE share price changes.