£20,000 invested in BAE Systems shares 4 years ago is now worth…

BAE Systems’ shares have soared since 2022, yet rising NATO budgets are just starting to feed through, so the real good news lies ahead for savvy investors.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Arrow symbol glowing amid black arrow symbols on black background.

Image source: Getty Images

£20,000 invested in BAE Systems (LSE: BA) shares on 24 February 2022 — the day Russia invaded Ukraine — would now be worth around £80,668, with dividends included.

The surge in global defence spending since that moment has driven one of the most sustained re‑ratings anywhere in the FTSE 100. It has pushed BAE’s order book, earnings visibility and cash generation to record levels.

But NATO members have now pledged to lift combined defence budgets to 5% of GDP by 2035, up from around 2% last year. It is an increase worth roughly $423bn (£314bn) a year across non‑US members alone. And as Europe’s largest defence contractor and the world’s sixth‑largest, BAE sits at the centre of this shift.

So is now the time for me to add to my holding in BAE?

Where’s the value going to come from?

Over the long run, earnings growth creates real shareholder value, not short‑term market swings. And the companies that can expand revenues, margins and cash flow consistently are the ones whose share prices tend to benefit most.

A risk to BAE is any delay on major long‑cycle defence programmes, which can squeeze margins and slow cash conversion. Another is a fault in a key product line, which could be expensive to remedy and potentially damage the firm’s reputation.

That said, consensus analysts’ forecasts are that BAE’s earnings will grow an average 12% a year over the medium term. This looks well supported by its recently-released 2025 results. These showed underlying earnings before interest and taxes (EBIT) rise 12% year on year to £3.3bn, while sales increased 10% to £30.7bn.

Free cash flow stayed strong at £2.16bn, despite higher R&D investment, while order intake of £36.8bn drove the backlog to a record £83.6bn. This reflected robust demand across air, maritime, electronic systems and US platforms.

Management forecasts increases this year of 9%-11% in EBIT and 7%-9% in sales. Free cash flow is projected at over £1.3bn.

Are the shares still undervalued right now?

For a business like BAE, forward‑looking relative measures matter far more than backward‑looking ones. This is because defence spending, order visibility and margin guidance all shape future earnings in a way past valuations simply cannot capture.

On the key forward price-to-earnings ratio, the firm’s 28.8 is bottom of its competitor group, which averages 32.4. These firms comprise L3Harris Technologies at 30.4, Rolls-Royce at 31.1, TransDigm at 32.7, and RTX at 35.2.

So despite its huge share price gains since 2022, BAE is still undervalued on this measure.

It is even more pronounced in its forward price-to-sales ratio of 2 against its peers’ average of 4.1. And it also looks a bargain at a price-to-book ratio of 5.7 compared to the 14.3 average of its competitors.

Taken together, these relative measures suggest that even after its powerful multi‑year rally, BAE still trades at a meaningful discount to its global peers.

My investment view

Despite the multi‑year rally in the share price, the stock still looks materially cheaper than comparable defence majors. And with earnings and cash flow now underpinned by multi‑year government commitments, the outlook remains strong.

That is exactly the kind of set-up I look for, so I will add to my holding very shortly. In the meantime, other undervalued high-growth stocks have also caught my eye.

Simon Watkins has positions in BAE Systems and Rolls-Royce Plc. The Motley Fool UK has recommended BAE Systems and Rolls-Royce 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.

More on Investing Articles

Investing Articles

Up 50% in a year! Now check out the intriguing BP share price forecast for the next 12 months

The BP share price is up one day, down the next, as geopolitical uncertainty rattles the FTSE 100. Harvey Jones…

Read more »

Investing Articles

Is now the perfect time to buy high-yield FTSE 100 dividend shares? 

Harvey Jones says UK dividend shares have a brilliant track record of delivering income and growth, and he can see…

Read more »

Bronze bull and bear figurines
Investing Articles

At 7,000 points, the S&P 500 looks bloated. How should investors navigate this market?

AI-hype may have ballooned the S&P 500 into the mother of all bubbles – but only time will tell. For…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

How £100 can start a portfolio of UK stocks

Whether it’s building wealth or earning passive income, UK investors might be surprised at what £100 a month in stocks…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How £16,000 can generate a second income in a Stocks and Shares ISA

Stephen Wright explains how UK investors can target an immediate £1,224 annual second income from UK dividend shares with a…

Read more »

Bronze bull and bear figurines
Investing Articles

This crazy growth stock is up 97% inside 2 months in my ISA!

Hims & Hers Health (NYSE:HIMS) is both an exciting and incredibly volatile growth stock. What on earth has sent it…

Read more »

Woman riding her old fashioned bicycle along the Beach Esplanade at Aberdeen, Scotland.
Investing Articles

How to target a million-pound SIPP by investing in UK shares

Harvey Jones shows how investors could target a SIPP worth a life-changing seven-figure sum, by investing in FTSE 100 dividend…

Read more »

A rear view of a female in a bright yellow coat walking along the historic street known as The Shambles in York, UK which is a popular tourist destination in this Yorkshire city.
Investing Articles

Buying £20k of BAE Systems shares could give me a £360 income this year!

Looking for the best dividend stocks out there? Royston Wild explains why BAE Systems shares are worth considering.

Read more »