Diversified Defense Demand And Global Tensions Will Drive New Order Expansion

Key Takeaways

• Surge in global defense spending and modernization drives strong, visible growth for BAE, with expanded opportunities in advanced, high-value defense technologies and systems.
  
• Broad international presence and increased investment in R&D, production, and local partnerships diversify revenue streams and reduce reliance on limited government customers.
  
• Rising ESG concerns, contract concentration, supply chain strains, and intensified competition threaten BAE Systems' revenue growth, margins, and market position despite strong backlogs.

Catalysts

Provides defense, aerospace, and security solutions in the United States, the United Kingdom, the Middle East, Australia, Japan, Europe, and internationally.

• The company's order backlog has surged to £75 billion, with a pipeline of new opportunities partly fueled by higher defense spending commitments across NATO, the US, UK, Europe, and Indo-Pacific (e.g., UK targeting 2.5% of GDP on defense by 2035, Japan doubling spending by 2027). This provides exceptional visibility on future revenues and underpins strong topline growth for multiple years.
  
• Strong growth in emerging defense segments such as drones, munitions, electronic warfare, and advanced platforms-driven by ongoing modernization and adoption of next-gen military tech by governments-positions BAE to capture above-industry revenue growth and potentially expand margins as higher-value, differentiated offerings scale up (e.g., FalconWorks, Tempest/FCAS, missile systems).
  
• BAE is investing heavily in advanced R&D, production capacity, and strategic bolt-on acquisitions, particularly in autonomy, uncrewed systems, and simulation, capitalizing on the global focus on next-generation defense capabilities and further reinforcing multi-year earnings growth and margin improvement.
  
• Expanded international footprint and localization strategies (e.g., joint ventures in Japan and Italy, in-country production in Australia and Europe) position BAE to benefit from national sovereignty initiatives and local content requirements, further diversifying revenues and reducing risk from dependence on a narrow set of government customers.
  
• Ongoing ramp in capacity and production for high-demand programs (e.g., Eurofighter Typhoon, MBDA missile systems, Hägglunds combat vehicles, AMPV in the U.S.) in response to urgent replenishment needs and rising geopolitical threats should lead to sustained strong sales, operating leverage, and margin expansion over the medium term.

BAE Systems Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BAE Systems's revenue will grow by 10.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.2% today to 7.6% in 3 years time.
• Analysts expect earnings to reach £2.8 billion (and earnings per share of £0.95) by about September 2028, up from £2.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as £2.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.0x on those 2028 earnings, up from 26.8x today. This future PE is greater than the current PE for the GB Aerospace & Defense industry at 24.6x.
• Analysts expect the number of shares outstanding to decline by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.16%, as per the Simply Wall St company report.

BAE Systems Future Earnings Per Share Growth

Risks

• Intensifying ESG (environmental, social, governance) and anti-defense sentiment among shareholders and institutions could lead to reduced investor appetite for BAE Systems stock and potentially increase its cost of capital over time, negatively impacting future valuation and access to capital.
  
• Overreliance on large, multi-decade government contracts-particularly from the UK, US, Saudi Arabia, and a handful of high-profile defense programs (like Eurofighter, AUKUS, and MBDA)-exposes BAE Systems to concentrated political, regulatory, and budgetary risks; loss, reduction, or cancellation of any major contract would pose significant revenue and cash flow challenges.
  
• Structural growth constraints in key areas, such as missile production through MBDA, indicate that while order backlogs are high, revenue realization is capped by bottlenecks (capacity scaling issues, lumpy point-in-time delivery, and complexity in production), hindering the timely conversion of backlog to sales and profits and risking missed market opportunities.
  
• Persistent supply chain pressures (component shortages, skilled labor scarcity, and cost inflation) alongside rising CapEx and R&D requirements for new platforms (drones, uncrewed systems, digitalization) may erode operating margins and reduce predictability of earnings despite continued top-line growth.
  
• Increasing global competition from state-backed and emerging defense companies (especially in Asia), coupled with the trend toward localization of defense production, may limit BAE Systems' ability to win new contracts in key markets, adding pressure to both revenue growth and overall market share over the long term.

Valuation

• The analysts have a consensus price target of £20.748 for BAE Systems based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £25.0, and the most bearish reporting a price target of just £13.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £36.5 billion, earnings will come to £2.8 billion, and it would be trading on a PE ratio of 28.0x, assuming you use a discount rate of 8.2%.
• Given the current share price of £17.77, the analyst price target of £20.75 is 14.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.