UPDATE: BAE Systems (LSE: BA) shares have plunged 15% as market analysts misinterpret the implications of a potential Ukraine peace deal. This drop raises urgent questions about the stock’s true valuation and future growth potential.
Despite the current downturn, investors should take note: NATO has committed to more than doubled defense spending, a move that promises long-term stability for BAE Systems. Analysts argue that this structural shift is being overlooked as the stock is currently priced for a cyclical downturn.
Officials confirmed that non-US NATO members agreed to increase defense budgets to 5% of GDP by 2035, a significant rise from 2% last year. This translates to an astonishing $423 billion in additional annual spending, positioning BAE Systems as a key player in this investment cycle.
The company reported strong earnings on 30 July 2025, with group sales up 11% year-on-year to £14.6 billion. Earnings before interest and tax (EBIT) rose by 13% to £1.55 billion, and basic earnings per share increased 11% to 34.7p. The order intake reached £13.2 billion, contributing to a robust order book of £75.4 billion.
Management has revised full-year sales guidance upward to 8%-10%, a notable increase from the previous 7%-9% forecast. This trend reflects the company’s adaptability and potential for sustained growth amidst rising defense budgets.
The disconnect between market pricing and actual performance creates a unique opportunity for investors. BAE Systems is currently trading at a forward price-to-earnings ratio of 23.5, down from 28.5 in June, suggesting that the market is undervaluing the company’s future earnings potential.
Despite the recent share price decline, consensus forecasts indicate that BAE Systems’ earnings are expected to grow at an impressive 11.2% annually through the end of 2028. This growth is driven by a solid order book and long-term contracts that underpin revenue stability.
“The stock’s valuation implies a slowdown just as the fundamentals point to sustained acceleration,” experts warn. This gap between perception and reality presents a compelling investment opportunity.
Investors are advised to consider the long-term implications of NATO’s defense spending plans. With such significant budget increases on the horizon, BAE Systems is poised for a recovery that could see its stock price rise to a fair value of £24.31, representing a 28% upside from its current price of £17.50.
The urgency of this situation cannot be overstated; as defense budgets rise, the potential for BAE Systems to capitalize on these contracts grows stronger. Investors and analysts alike should watch closely as the market recalibrates to the realities of defense spending.
As this story develops, stay tuned for further updates on BAE Systems and the implications for the defense sector. The next few months will be critical as the company navigates its position amidst changing market dynamics.
