BAE Systems (LSE: BA.) shares have soared in 2025. Year to date, they’re up 64% on the back of concerns over America’s commitment to NATO and the recent conflict in the Middle East.
Is it too late to consider buying them after this enormous share price gain? Let’s take a look at the current set-up for the defence contractor.
Still time to buy?
Looking at the FTSE 100 stock today, my view is that it’s probably not too late to consider it for a portfolio, despite its monster gains this year. There are a few reasons why.
One is that global defence spending is likely to rise significantly in the years ahead. Up until recently, NATO countries had set a target of 2% of gross domestic product (GDP) for their defence budgets. However, at NATO’s 2025 summit in the Netherlands last week, members endorsed a plan to massively ramp up spending to 3.5% of GDP by 2035. That’s a material increase and it should translate to more contracts and higher revenues for companies such as BAE Systems.
Another reason is that the valuation doesn’t look crazy. If we look ahead to 2026, the consensus earnings per share (EPS) forecast is 83.4p (11% higher than the forecast for 2025). At today’s share price of 1,887p, that puts BAE Systems shares on a price-to-earnings (P/E) ratio of about 22.6. That’s well above the FTSE 100 average, but it doesn’t strike me as that high given the supportive backdrop and high level of projected earnings growth.
A better defence play?
Having said all that, defence is a competitive industry. And a risk with this stock is that other companies, such as Rheinmetall, RTX, and Northrop Grumman, could be awarded major contracts instead.
It’s worth noting that these three companies all offer very relevant solutions today. RTX, for example, offers the Patriot missile defence system, which uses radars, command-and-control technology, and multiple types of interceptors to detect, identify, and eliminate aerial threats.
Given the uncertainty over contracts, I think it could be safer to consider playing the defence theme through an exchange-traded fund (ETF) that provides access to a range of different companies in the industry. That’s how I’m playing it personally.
I’ve invested in the HANetf Future of Defence UCITS ETF, which gives me exposure to all of the companies listed above, as well as a bunch of AI/cybersecurity stocks such as CrowdStrike and Palantir. Overall, it gives me exposure to about 60 different stocks.
This ETF isn’t foolproof, of course. If geopolitical tension dies down or sentiment towards defence/cybersecurity stocks sours, the ETF could take a hit.
I think it’s worth considering as a long-term investment, however. To my mind, the defence industry is set for growth and I think this product is a great way to get exposure.
