BAE Systems (LSE: BA) share price is trading around an all-time high at £20.59. This marks a 243% increase from its opening price on 24 February 2022 when Russia invaded Ukraine. And over this year alone it has risen 80% from its 6 January traded low of £11.44.
However, experience has taught me that a share’s price and value are different things. I spent several years as a senior investment bank trader and three decades so far as a private investor.
Price is just the figure that markets are willing to pay for a stock at any given moment. But value reflects the true worth of the underlying business, based on fundamental factors.
So, despite, BAE Systems’ huge price rise, it could still be packed with value. And experience has also taught me that asset prices tend to converge to their true value over time.
How the underlying business looks
Earnings growth is the key factor that drives any firm’s stock price and dividends higher over the long term.
A risk to BAE Systems is a major failure of its key products. This could be very costly to fix and might seriously damage its reputation.
However, analysts forecast that the defence giant’s earnings will grow by a very strong 11.3% a year to end-2027.
Its most recent results – H1 2025, released on 30 July 2025 — support this bullish view.
Underlying earnings before interest and tax (EBIT) jumped 13% year on year to £1.55bn as sales rose 11% to £14.621bn. Underlying earnings per share climbed 12% to 34.7p.
As a result of these numbers, the firm upgraded its sales guidance for the full year — to 8%-10%, from 7%-9%. Last year, sales were £28.335bn. It also upgraded its underlying EBIT guidance – to 9%-11%, from 8%-10%, with last year’s figure being £3.015bn.
Major new order flows
In June, NATO members committed to investing 5% of gross domestic product (GDP) in defence, up from 2% last year.
As Europe’s number one defence company by revenue and the world’s number six, BAE Systems is set to keep benefitting from this.
In the past few weeks alone, BAE Systems has been involved in multiple major defence initiatives. On 12 September, for example, it forged a strategic partnership to establish an artillery ammunition manufacturing facility in Poland.
On 9 September, it announced it would collaborate with US defence giant Lockheed Martin on new aerial drone systems.
And on 31 August, it was chosen by Norway to build up to six frigates in a $10bn (£7.46bn) deal.
So, is the share price undervalued?
The discounted cash flow model pinpoints the price at which a stock should trade. This is based on cash flow forecasts for the underlying business.
In BAE Systems’ case, it shows the shares are 19% undervalued at their current £20.59 price.
Therefore, their fair value is £25.42.
I already have a very good-sized holding in the firm from lower levels and am very happy with that.
However, if I did not already have this, I would buy the stock now and think it is worth considering.
I believe it is set to go much higher based on its strong earnings growth prospects and it is still trading at a discount to its fair value.
