BAE Systems (LSE: BA.) shares have experienced a material pullback recently. After rising above 2,350p in mid-March when geopolitical uncertainty was at high levels, they’ve fallen to around 1,950p.
Are they worth considering after this pullback? Let’s discuss.
Performing well in 2026
BAE’s most recent trading update, posted on 7 May, was very encouraging. Here, it said that it was seeing increased defence spending across all its key markets and that it had traded well in the first four months of the year.
Looking ahead, for 2026 it expects:
- Sales growth of 7%-9% (2025: £30.7bn)
- Underlying earnings before interest and tax (EBIT) growth of 9%-11% (2025: £3.3bn)
- Underlying earnings per share growth of 9%-11% (2025: 75.2p)
- Free cash flow of more than £1.3bn
These are attractive levels of growth for a mature, FTSE 100 company. For reference, defence rival Rolls-Royce is only expected to see top-line growth of around 6.7% this year.
It’s worth noting that the company said that it’s well positioned for growth over the medium term as well thanks to rising levels of defence spending and its strong portfolio of related solutions. It sees “significant opportunities” in areas such as space systems, missile and air defence systems, drones and counter-drone technology, electronic warfare, combat aircraft, combat vehicles, frigates, and submarines.
We’ve delivered a strong start to 2026, underpinning our full‑year guidance. Our geographic breadth, proven multi‑domain capabilities, and focus on operational excellence and innovation are enabling consistent delivery of critical programmes. We’re well positioned for both current and future opportunities in defence.
Charles Woodburn, BAE Systems CEO
How’s the valuation?
What about the valuation though? Are the shares priced attractively relative to the level of growth being generated?
I think they are. Let’s say the company grows its earnings by 10% this year (the mid-point of guidance) – that takes us to 82.7p per share.
At today’s share price of 1,950p, that gives us a price-to-earnings (P/E) ratio of around 23.6. That’s well above the market average, however, I don’t think it’s crazy.
After all, this is a company that operates in an industry with very high barriers to entry (you can’t just launch a submarine business and instantly start selling products to the Ministry of Defence). It’s also highly resistant to AI disruption (Anthropic can’t make a submarine).
I’ll point out that I’m not the only one who believes the shares are priced attractively today. Looking at broker price targets, many are well above the current share price.
At present, the average price target here is 2,312p. That’s about 20% above the current share price.
Worth a look?
Of course, there are no guarantees that the shares will rise to 2,312p – broker forecasts need to be taken with a grain of salt. There are also no guarantees that the company will hit its 2026 targets (supply chain challenges are a risk).
Overall though, I like the look of the stock at current levels and think it’s worth considering. If I didn’t have a large position in a defence ETF (which holds BAE), I would consider buying shares myself.
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Edward Sheldon does not hold any positions in the companies mentioned.
