BAE Systems’ (LSE: BA) share price has been knocked back recently as markets fixate on short-term headlines about the ongoing US/Iran peace talks.
But this narrow focus on (hopefully) good news misses the far bigger story. NATO is now embarking on a dramatic, long-term expansion of defence spending that will run for at least the next decade. Estimates are that this will involve $2.7trn (£2trn) in extra annual spending through to 2035.
And BAE sits at the centre of the alliance’s core platforms, munitions, and next‑generation systems. So it is perfectly positioned to be one of the biggest beneficiaries of this long-term structural shift. I already own shares in the firm, but should I buy more on the current price dip?
Is the stock a bargain now?
The shares have fallen 20% since their 18 March one-year traded high of £23.59. This has only added to the considerable undervaluation I had noticed before.
As it stands, BAE is bottom of its competitor group on the key forward price-to-earnings ratio. I use the forward measure because I am interested in where the stock is going, not where it has been.
It trades at just 23.6, against an average of 31.7. The group comprises L3Harris Technologies at 24.3, RTX at 31.4, TransDigm at 33.9, and Rolls-Royce at 37.4.
So, BAE Systems looks very cheap on this basis.
The same applies to its forward price-to-sales ratio of 1.6 — again bottom of its group, which averages 4.2. And BAE Systems also looks a bargain at its price-to-book ratio of 4.4 compared to the 16.4 average of its rivals.
How does the core momentum look?
However, a low valuation only matters if the business can keep growing strongly — with earnings being the key driver.
A risk here is any delay to BAE’s major programmes — particularly in munitions, air systems, and next‑generation platforms. These could temporarily pressure margins even as long‑term demand remains strong. Another is increasing supply‑chain constraints, which could slow BAE’s ability to convert its record order book into delivered revenue.
Nonetheless, analysts forecast the defence giant’s earnings will increase by a very robust annual average of 12% over the medium term at minimum.
The projection looks well supported by its 2025 results, released on 18 February this year. Underlying earnings before interest and tax jumped 12% to £3.3bn, lifting return on sales to 10.8%.
The robust numbers came from strong ongoing demand across air, maritime, electronic systems and combat vehicles. Indeed, order intake rose to £36.8bn, powering the order backlog to a record £83.6bn.
My investment view
For me, the recent pullback looks like a classic case of the market obsessing over short‑term geopolitical noise while ignoring a decade‑long structural tailwind.
This has left BAE trading at the bottom of its peer‑group valuations, despite its tremendous fundamentals. These include record orders, strongly rising earnings, and one of the most diversified operations across NATO’s rearmament programmes.
With long‑cycle demand effectively locked in, I see the current dip as an attractive opportunity to build my position further. For the same reasons, I think the stock extremely worthy of consideration by savvy, long-term investors.
Should you invest £5,000 in BAE Systems right now?
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Simon Watkins owns shares in BAE Systems and Rolls-Royce.
