UPDATE: BAE Systems’ share price has plunged 15% as markets react to ongoing discussions about a potential peace deal in Ukraine. However, experts argue that the market is overlooking a critical factor: NATO’s commitment to significantly increasing defense spending.
As tensions escalate, NATO members are set to more than double their defense budgets, committing to 5% of GDP by 2035, a leap from just 2% last year. This translates into an astonishing $423 billion in additional annual spending across non-US NATO countries alone. BAE Systems, as Europe’s largest defense contractor, stands to benefit immensely from this long-term structural change.
On July 30, BAE Systems reported impressive half-year results for 2025, with group sales rising 11% year-on-year to £14.6 billion. Earnings before interest and tax (EBIT) surged 13% to £1.55 billion, and basic earnings per share also increased by 11% to 34.7p. The company boasts a robust order intake of £13.2 billion, propelling its total order book to a staggering £75.4 billion.
Despite these promising figures, BAE Systems is facing a market perception that suggests impending earnings declines. The stock is currently trading at a forward price-to-earnings ratio of 23.5, down from 28.5 in June. Analysts forecast earnings growth of 11.2% annually through 2028, yet the pricing does not reflect this potential.
The disconnect between market perception and actual fundamentals creates a compelling investment opportunity. The discounted cash flow analysis indicates that BAE Systems shares are 28% undervalued at their current price of £17.50, with a fair value estimate of £24.31. Investors are urged to consider the long-term implications of NATO’s defense spending commitments, which are already locked into contracts, ensuring a steady revenue stream for BAE Systems.
In conclusion, BAE Systems is poised for significant growth, supported by a record order book and upgraded sales guidance. The firm is positioned to capitalize on the decade-long rearmament cycle within NATO budgets. As this narrative unfolds, investors are advised to closely monitor BAE Systems, as the gap between market perception and reality presents a unique opportunity.
Investors looking for a promising long-term play may find now is the time to consider adding to their holdings in BAE Systems. Share this urgent update with fellow investors to keep them informed of this developing situation.
