Here’s the growth forecast for BAE Systems shares through to 2026!

BAE Systems’ shares have soared on the back of resurgent defence spending. Can the FTSE 100 firm continue delivering good profits growth?

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BAE Systems (LSE:BA.), like other major defence shares, tend to enjoy stable earnings from year to year. It reflects the reliable nature of arms spending which remains unaffected by wider economic conditions.

The outlook for these companies has improved significantly since 2022. And for BAE, City analysts expect earnings growth to speed up to double-digit territory beyond this year.

YearPredicted earnings per shareAnnual growthPrice-to-earnings (P/E) ratio
202467.71p6%19.2 times
202576.23p13%17.1 times
202684.21p11%15.5 times

If it can hit (or exceed) these bright targets, BAE Systems — whose share price has risen 51% in the past two years — could continue to soar in value.

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The key question, naturally, is how realistic these earnings forecasts are. It’s common for corporate earnings to either surpass or undershoot analysts’ predictions.

So can the FTSE 100 company really meet those broker estimates? And should I buy BAE shares for my portfolio?

Market pick-up

Created with Highcharts 11.4.3BAE Systems PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

As mentioned before, the defence sector has witnessed a bump in the last couple of years. Russia’s invasion of Ukraine has ignited fears of a fresh Cold War, thus prompting countries across NATO to rapidly rearm.

War in Eastern Europe isn’t the only driver behind rejuvenated arms spending though. Concerns over Chinese expansionism in Asia, fresh hostilities in the Middle East, and the ongoing fight against terrorism also mean defence budgets are growing.

Worldwide defence spending soared almost 7% in real terms in 2023, according to the Stockholm International Peace Research Institute (SIPRI), to new peaks above $2.4trn.

Demand jump

BAE Systems is a critical hardware and services supplier to both the US and UK. And so it’s in one of the box seats to capitalise on this industry upswing.

Both sales and underlying earnings rose an impressive 13% in the six months to June. And encouragingly, the firm’s order backlog also rose to a record £74.1bn in the period. This provides it with solid earnings visibility.

Looking ahead, submarine builder BAE also stands to be one of the big winners as the UK upgrades its nuclear deterrent. It plans to double capacity at its main boatbuilding site in Barrow in Furness to capitalise on this opportunity too.

Possible threat

Like any company however, BAE Systems faces threats that could hit earnings forecasts. In this case, I’m especially concerned by its ability to meet orders if part sourcing remains problematic.

BAE said it “continues to work with, and support, its supply chain to actively address the risk of disruption” in its half-year update. But sector peer Senior‘s October profit warning underlines the scale of the difficulties aerospace and defence companies face.

The verdict

That said, I believe that on balance BAE Systems’ shares are highly attractive right now. I expect defence spending to rise steadily over the next decade, underpinning robust earnings growth for the FTSE 100 firm.

I’m considering adding it to my own portfolio when I next have cash to invest.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended BAE Systems and Senior Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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