BAE Systems’ (LSE: BA) share price is down 7% from its 6 May 12-month traded high of £18.08.
I think most of this is due to profit-taking after the high was hit. It may also reflect Ukrainian President Volodymyr Zelenskyy’s comment that he may meet Russian counterpart Vladimir Putin this week.
Whatever the reason, the dip has only added to the considerable value already present in the stock, in my view.
How much value remains in the shares?
The first part of my standard stock price assessment is to contrast its key valuations with those of its competitors.
On its price-to-sales ratio of 2, BAE Systems looks undervalued compared to its competitors’ average of 4.2. These comprise L3Harris Technologies at 1.9, RTX at 2.1, Rolls-Royce at 3.5, and TransDigm at 9.3.
It also looks undervalued on its 27.1 price-to-earnings ratio against its peer group’s average of 33.8.
The second part of my assessment seeks to pinpoint where any firm’s stock price should be, based on future cash flow forecasts for it. The resultant discounted cash flow analysis for BAE Systems shows its shares are 30% undervalued at their present £16.75 price.
Therefore, their fair value is £23.93, although share price moves are unpredictable.
Does the core business support this bullishness?
In its 7 May trading update, BAE Systems said its year started strongly and maintained its 2025 guidance.
This is for a 7%-9% year-on-year rise in sales from 2024’s £28.3bn. It also projects an 8%-10% increase in earnings before interest and taxes (EBIT) from last year’s £3bn.
It also highlighted multiple major deals awarded over the year to date. These include an $800m (£599m) contract for its Intelligence & Security business from the US Air Force, and £600m in orders for missile systems.
Looking further ahead, the firm forecasts higher defence spending in all its key operational markets. As the biggest defence firm in Europe, it highlighted that its range of products is well-aligned with the needs of its constituent countries.
This accords with NATO members’ efforts to increase spending to the 5% of gross domestic product (GDP) envisaged by US President Donald Trump.
Additionally, the firm says it is currently working with the UK government on its ongoing Strategic Defence Review and Defence Industrial Strategy. It has already committed to increase its defence spending to 2.5% of the country’s GDP from 2027.
And in the US, BAE Systems underlined that its portfolio is already well-positioned with Washington’s international defence and intelligence customers. These include capabilities in combat vehicles, electronic warfare programmes, precision guidance and missile defence systems, and space electronics and spacecraft.
Will I buy more of the stock?
A risk in the stock is a major failure in one of its key products that could be costly to fix and might damage its reputation.
That said, consensus analysts’ estimates are that its earnings will increase by 8.28% a year to the end of 2027. And it is growth here that ultimately drives a firm’s share price higher.
As such, I believe its share price will soar even higher in the coming years, so I will buy more of the stock very soon.
