Company Reports

Escalating geopolitical tensions are driving a multidecade rearmament cycle. After decades of underspending, Europe is rebuilding sovereign capacity in air, land, naval, and missile ecosystems. BAE Systems remains at the center of this shift through incumbency on multidecade programs.

BAE Systems’ first-half sales rose 9% at constant currency to GBP 15.8 billion, underlying EBIT rose 11% to GBP 1.7 billion, and orders reached GBP 16.4 billion. Management raised its 2026 growth outlook for sales to 8%-10%, EBIT to 10%-12%, and free cash flow to over GBP 2 billion.

Escalating geopolitical tensions are driving a multidecade rearmament cycle. After decades of underspending, Europe is rebuilding sovereign capacity in air, land, naval, and missile ecosystems. BAE Systems remains at the center of this shift through incumbency on multidecade programs.

Escalating geopolitical tensions are driving a multidecade rearmament cycle. After decades of underspending, Europe is rebuilding sovereign capacity in air, land, naval, and missile ecosystems. BAE Systems sits at the center of this shift through incumbency on multidecade programs.

BAE Systems reported 2025 sales of GBP 30.7 billion (10%-plus constant currency), underlying EBIT of GBP 3.3 billion (12%-plus), and free cash flow of GBP 2.2 billion, supported by a record backlog of GBP 83.6 billion and order intake of GBP 36.8 billion (book/bill of 1.2 times).

European defense stocks rose on Jan. 8 after President Donald Trump called for a roughly 66% increase in the 2027 US defense budget, alongside renewed geopolitical risk from Washington’s rhetoric on Greenland.

Escalating geopolitical tensions are driving a multidecade rearmament cycle. After decades of underspending, Europe is rebuilding sovereign capacity in air, land, naval, and missile ecosystems. BAE Systems sits at the center of this shift through incumbency on multidecade programs.

Reports of the US-driven Russia-Ukraine peace deal triggered a downturn in European defense stocks, with names under our coverage down between 10%-20% since October highs.

European defense stocks fell sharply after US President Donald Trump met with Russian President Vladimir Putin in Alaska and with Ukrainian President Volodymyr Zelenskyy in Washington. Markets linked the selloff to media reports of a potential ceasefire and US-led deals.

BAE raised 2025 sales and EBIT guidance to 8%-10% and 9%-11%, respectively, after 11% revenue and 13% EBIT growth. EPS was held flat due to higher French tax on MBDA and fewer shares repurchased. Free cash flow guidance was raised to over GBP 1.1 billion.

NATO set a new defense spending target of 5% of GDP, with 3.5% allocated to core defense and implementation shifted from 2032 to 2035. The agreement places renewed emphasis on European joint procurement as part of a broader push for defense integration.

On June 13, Israel launched a series of strikes against Iranian facilities and personnel targeting its nuclear enrichment and armament programs. Shares of global defense contractors appreciated as much as 4% in early trading in reaction to the news.

We raise our fair value estimate for BAE Systems from GBX 1,550 to GBX 2,250 to reflect a structurally stronger growth outlook, underpinned by maintained global rearmament and deepening integration with European defense priorities. The UK’s reentry into EU-funded programs via the EUR 150 billion EDIS framework marks a turning point in regional alignment. While the fund remains below what we consider sufficient to address Europe’s defense capability gap, it lays a critical foundation for broader industrial coordination and larger-scale future instruments.

Escalating global security concerns, intensified by the war in Ukraine, are driving structurally higher growth in the defense market. We anticipate this growth will be uninterrupted for at least several years, considering that many countries, particularly in Europe, have underspent since the end of the Cold War. BAE Systems is strategically positioned to benefit, given its significant stakes in a broad array of major international defense projects.

While it is still too early to fully assess the implications of the proposed tariffs on the defense sector, it's important to consider the US' role in the global defense trade. The US remains a net exporter of military equipment, accounting for roughly 43% of global arms exports between 2021 and 2023 (based on SIPRI TIV data), while representing just 3% of global arms imports over the same period. Although the US defense industry is largely self-sufficient in end-product manufacturing, it remains exposed to risks tied to critical raw material imports—such as gallium, yttrium, and tantalum—which are vital for systems like fighter jets, helicopters, armored vehicles, and precision munitions.

Escalating global security concerns, intensified by the war in Ukraine, are driving structurally higher growth in the defense market. We anticipate this growth will be uninterrupted for at least several years, considering that many countries, particularly in Europe, have underspent since the end of the Cold War. BAE Systems is strategically positioned to benefit, given its significant stakes in a broad array of major international defense projects.

Wide-moat BAE Systems reported another strong year with the backlog reaching a record GBP 77.8 billion and sales and EBIT increasing by 14% year on year, in line with expectations.

We've updated our fair value estimate for BAE Systems to GBX 1,550/USD 75 per share from GBX 1,490/USD 74 to reflect increased European defense spending catalyzed by Donald Trump's election as US president. While NATO's defense spending target of 2% of GDP has been a longstanding benchmark, we believe it is inadequate, given decades of underinvestment. Trump's call for NATO allies to raise their contributions could drive substantial increases in defense budgets. We expect European defense spending to rise from 1.7% of GDP in 2023 to 2.4% by 2029 and 2.8% by 2032.

Escalating global security concerns, intensified by the Ukraine conflict, are driving structurally higher growth in the defense market. We anticipate this growth will be uninterrupted for at least several years, considering that many countries, particularly in Europe, have underspent since the end of the Cold War. BAE Systems is strategically positioned to benefit, given its significant stakes in a broad array of major international defense projects.

Escalating global security concerns, intensified by the Ukraine conflict, are driving structurally higher growth in the defense market. We anticipate this growth will be uninterrupted for at least several years, considering that many countries, particularly in Europe, have underspent since the end of the Cold War. BAE Systems is strategically positioned to benefit, given its significant stakes in a broad array of major international defense projects.