BAE Systems (LSE:BA.) Valuation in Focus as Shares Extend Recent Momentum

BAE Systems (LSE:BA.) Shares Gain Momentum, Raising Fresh Questions for Investors

BAE Systems (LSE:BA.) shares have caught the market’s eye again, with a recent move that has sparked fresh debates among investors. It is not every day you see a stock rally without a headline-grabbing catalyst in play, so this uptick might leave many wondering if the market is picking up on something beneath the surface. With no big news event to point to, it sets the stage for a closer look at whether the advance is simply catching up with fundamentals or signaling new optimism about the company’s future.

This renewed momentum comes after a year marked by steady gains and decent growth figures for BAE Systems. The stock has returned an impressive 51% over the past year and notched up more than 70% since the start of 2024. Short-term moves show double-digit gains in the month and past three months. Recent results revealed healthy revenue and profit growth, but without a clear trigger behind the latest surge, it raises eyebrows among those watching valuation trends.

So, is this a window to buy shares at a discount or is the market already baking in ambitious growth for BAE Systems going forward?

Most Popular Narrative: 4.5% Undervalued

According to the most closely followed narrative, BAE Systems shares are priced below their calculated fair value. This suggests potential undervaluation by the market based on fundamental growth assumptions and risk factors.

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 regions (for example, the UK targeting 2.5% of GDP on defense by 2035 and Japan doubling spending by 2027). This provides exceptional visibility on future revenues and supports strong topline growth for multiple years.

Want to know the bold financial projections powering this valuation? One aspect of the narrative hinges on consistent revenue expansion and significant profit forecasts, matched by a forward-looking market expectation. Are analysts anticipating a sustained industry transformation, or do they predict record-setting performance ahead? The answers might surprise you.

Result: Fair Value of £20.75 (UNDERVALUED)

Have a read of the narrative in full and understand what's behind the forecasts.

However, persistent supply chain bottlenecks or rising anti-defense sentiment could challenge these growth projections. This could potentially dampen investor enthusiasm for BAE Systems shares.

Find out about the key risks to this BAE Systems narrative.

Another View: The DCF Model

Our SWS DCF model also suggests BAE Systems may be undervalued at current prices, which echoes the earlier narrative about hidden value. But does this reinforce the optimism, or does it overlook a risk beneath the surface?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out BAE Systems for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own BAE Systems Narrative

If you have a different take or want to dig into the numbers yourself, you can shape your own narrative in just a few minutes. Do it your way

A great starting point for your BAE Systems research is our analysis highlighting 3 key rewards and 1 important warning sign that could impact your investment decision.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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