In recent decades, defence companies like BAE Systems (LSE:BA.) have been viewed as ‘steady if unspectacular’ shares to buy. The stable nature of arms spending made them great companies to consider to give a portfolio some extra steel.
But Russia’s invasion of Ukraine in 2022 has changed the complexion of this popular share sector. Investors have been piling into defence stocks as part of a strategy to find the hottest growth shares.
BAE Systems has delivered double-digit earnings growth over the last few years. And City analysts are expecting this record to continue, as can be seen below:
| Year | Predicted earnings per share | Earnings growth | Price-to-earnings (P/E) ratio |
|---|---|---|---|
| 2025 | 75.47p | 10% | 23.5 times |
| 2026 | 83.57p | 11% | 21.2 times |
| 2027 | 92.25p | 10% | 19.2 times |
Making tracks
Naturally, broker estimates are just that and are frequently known to miss their targets. But fresh trading commentary today (7 May) suggests BAE Systems is heading in the right direction.
Celebrating what it described as “a strong start to 2025“, BAE said “the regions in which we operate are poised for higher defence spending“.
“We expect this to provide a robust set of further opportunities across all our sectors“, it added.
Sales are rising as broader spending from NATO countries moves higher. This includes the UK — from where the FTSE 100 firm generates 26% of sales — which has pledged to raise defence spending to 2.5% of GDP from 2027.
Accordingly, BAE’s spending heavily to capitalise on this opportunity and deliver strong growth. New facilities, including an explosives filling base in Wales and a new shipbuild assembly hall in Glasgow, are set to open this summer. It’s also creating more than 2,400 apprentice, undergraduate and graduate roles this year just in the UK.
For 2025, the company affirmed guidance that sales will rise 7-9% year on year, and for underlying earnings per share to improve between 8% and 10%.
US questions
Yet things are far from perfect for BAE Systems given uncertainty in the US. It faces the prospect of reduced spending Stateside as the Trump administration reduces his country’s role as ‘the world’s policeman’. There’s also uncertainty related to future tariffs and the impact this may have on costs.
The US is the company’s largest single market, so dispruption here could be significant at group level. But on balance, I believe the company remains relatively well-insulated from some of the risk.
Aarin Chekrie, shares analyst at Hargreaves Lansdown, notes: “The vast majority of equipment that BAE delivers to its US customers is already produced in-country… meaning [the company] shouldn’t be too affected by US tariffs as they currently stand.“
Should I buy the shares?
So is the FTSE 100 company a buy then? Well, BAE Systems shares don’t come cheap, commanding a P/E ratio of 23.5 times at current prices. However, I think this is a fair reflection of its excellent growth opportunities.
Rising geopolitical tension means global arms spending should/could continue to climb. And thanks to its expertise across a spectrum of product areas — from fighter jets and submarines, to drones, missile systems and cyber security — BAE’s well placed to capitalise on this.
I’ll be looking to buy BAE Systems shares when I next have spare cash to invest.
