It’s a sad truth that the wars in Ukraine and the Middle East – as well as a general increase in global uncertainty — have helped boost BAE Systems‘ (LSE:BA.) shares.
How do I know this? Well, they’re now (16 April) changing hands for 274% more than they were in February 2022, just before Russia launched its first attack on Kyiv.
And for those who are comfortable investing in the defence sector, I reckon there are plenty of reasons why now could be a good time to consider taking a stake. Let me explain.
Inoperable
For understandable reasons, the operational status of the Royal Navy’s ships isn’t publicised. However, according to recent newspaper reports, five of its six Type 45 destroyers are currently out of action.
At the start of the Iran war, repair work on HMS Dragon was hastily completed before it belatedly headed to the Mediterranean. It’s now in Cyprus undergoing further work. Last week, I heard an MP on the BBC complaining that four of the country’s six Type 23 frigates and HMS Elizabeth, one of its two aircraft carriers, were also out of action.
If true, it means 10 of the Navy’s 15 large ships are presently unable to be used. Remember the opening line from the chorus of that famous song? “Rule, Britannia! Britannia rule the waves“.
I’m not so sure.
Underwater
It appears to be a similar story with the country’s submarines. In late 2025, it was claimed that only two of the UK’s fleet of 10 were ready to go to sea.
This week, Lord Robertson, the former secretary general of NATO, warned about the state of the country’s military. He said: “We are underprepared… Britain’s national security and safety is in peril.”
An opportunity to consider
But one of the beneficiaries of this could be BAE Systems. It’s already the largest supplier to the Ministry of Defence and part-way through delivering the Navy’s Type 26 frigate programme. It’s also heavily involved with the upgrade of Trident.
However, if the UK government decides to speed up its plans to meet the NATO spending target of 3.5% of GDP, the country’s largest defence group’s likely to be a huge winner.
BAE Systems is also a major supplier to the US military. Here, President Trump wants a 50% increase in defence spending in 2027.
Possible issues
However, there are risks. The group’s shares are trading at nearly 32 times historic earnings. The five-year average is 18.7.
I suspect this lofty valuation reflects investor optimism about the group’s growth prospects but, even so, any sign of a slowdown and there could be a sharp correction in its share price.
Also, defence programmes are logistically challenging. Get things wrong and the cost over-runs could be significant.
Final thoughts
Despite these threats, BAE Systems looks to be performing well. In 2025, it reported an 8.2% year-on-year increase in sales. Underlying earnings per share rose by 9.8%. During the year, it also received new orders worth £36.8bn, bringing its backlog to £83.6bn. This is equivalent to nearly three times revenue.
Unfortunately, we live in a dangerous world. Therefore, I think those comfortable with the sector could consider taking a position in BAE Systems.
