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BAE Systems‘ (LSE: BA) share price is topping the FTSE 100 leaderboard as I write this in 13 June, as I guessed it would be.
I reckoned the defence engineer was only going one way after news broke that Israel had attacked Iranian nuclear facilities. While nearly all my portfolio is in the red this morning, BAE Systems is a rare exception, along with oil giant BP.
Writing that doesn’t give me any pleasure. I’d much rather the BAE share price was falling, because the world had found more peaceful ways to sort out its differences. Sadly, that’s not to be.
FTSE 100 growth star
BAE Systems shares are up 36% over the last 12 months and 275% over five years. Dividends come on top of that. The uncomfortable truth is that demand for its weapons and defence systems is rising, and may rise further after today.
BAE had a strong 2024, with full-year sales and underlying profit both up 14% to £28.3bn and £3.02bn, respectively. Its order backlog hit a record £77.8bn, jumping 11% year on year.
That momentum has continued into 2025. On 7 May, the company reaffirmed full-year guidance, forecasting revenue growth of 7% to 9%, with underlying earnings expected to climb 8%. It’s targeting free cash flow of more than £1.1bn.
BAE’s recent contract wins are vast and varied: a $356m procurement deal for armoured vehicles, a near-$800m extension with the US Air Force, and over $360m in amphibious vehicle orders from the US Marine Corps.
Packed order book
Add another £600m in missile system contracts via MBDA, and it’s easy to see why investors are optimistic.
Inevitably, success is priced in. The shares trade at a price-to-earnings ratio of just over 27, compared to the FTSE 100 average of around 15 times. This reflects market confidence that demand will remain robust.
But nothing in investing is guaranteed. If world leaders make a real effort to resolve tensions in Ukraine or the Middle East, procurement budgets could be reassessed. I’m not holding my breath, but it’s a possibility. Cash-strapped Western nations may also spend less on defence than leaders claim.
Like most advanced manufacturers, BAE depends on complex supply chains and skilled engineers. If components are delayed or talent becomes harder to find, costs could rise and delivery schedules slip. That would hurt profits.
Time to consider buying?
BAE is also exposed to currency shifts and US tariff threats. More than half of its income comes in dollars, but it reports in sterling. If the pound rallies against the dollar, reported earnings could take a knock. Today, the pound is softening, but that may not last.
Analysts’ consensus suggests the share price could hit 2,001p over the next 12 months. That’s up less than 3% from today’s 1,939p. It has to run out of steam at some point.
I put off buying BAE Systems for ages, hoping to buy on a dip, before giving up and diving in last year. It was expensive then, but I’m already up 50%. I still think investors might consider buying today, despite the premium price.
It’s not cheap. It’s not without risk. But given human nature, it can’t be ignored.
