While we have seen a lot of stock market turbulence so far this year, one company that has shrugged it off is BAE Systems (LSE: BA). The BAE share price has soared 51% since the start of 2025. That means the share has more than tripled over the past five years.
For the often staid-seeming defence sector, that is very strong performance.
Can it continue – and if so, ought I to consider adding the share to my portfolio?
BAE Systems has the wind in its sails
The defence environment has changed significantly over the past few years, leading many European governments to boost their budgets. That has been good news for defence contractors across the board, including BAE Systems.
Last year, for example, the UK defence giant reported a 14% growth in revenues. Meanwhile, net profit was up 5% and came in not far below £2bn.
The company expects sales and underlying earnings per share to rise by mid single to low double percentages this year.
A buoyant end market might not always mean a bargain
But while defence spending is stronger than before, I do have some concerns.
We have seen in the past that when times are strong, defence contractors can get gung ho making long-term deals that then become expensive for them to deliver, as costs rise over time.
Looked at in that light, I have mixed views on BAE’s order backlog. It ended last year at a record high of £78bn. That is good as it shows that the company has lots of work to keep it fully occupied. But it could also tie the company up for years to come and some of those orders may turn out to be less profitable than they look now when they are finally delivered.
On top of that, BAE Systems has a strong global presence, including in the US. Ongoing tariff uncertainty could distract management attention from growth and it may also eat into the bottom line.
Considering that, the current BAE share price-to-earnings ratio of 27 looks expensive to me. I think it offers an insufficient margin of safety for me if even some of those risks come to pass.
Momentum could continue
That does not mean that the BAE share price might not go higher from here. The recent momentum points to the fact that many investors are excited about the firm’s prospects. That could help pushing the share price up. A big contract win or other positive news could also boost the share price.
But as an investor, I am focussed on fundamentals not momentum. Based on what we currently know about the firm’s commercial outlook, I think the share price is expensive. I have no plans to invest.
