BAE Systems plc (BA.L) | Investment Case

1. Company Snapshot

1.a. Company Description

BAE Systems plc provides defense, aerospace, and security solutions worldwide.The company operates through five segments: Electronic Systems, Cyber & Intelligence, Platforms & Services (US), Air, and Maritime.The Electronic Systems segment offers electronic warfare systems, navigation systems, electro-optical sensors, military and commercial digital engine and flight controls, precision guidance and seeker solutions, military communication systems and data links, persistent surveillance systems, space electronics, and electric drive propulsion systems.

The Cyber & Intelligence segment provides solutions to modernize, maintain, and test cyber-harden aircraft, radars, missile systems, and mission applications that detect and deter threats to national security; systems engineering, integration, and sustainment services for critical weapons systems, C5ISR, and cyber security; and solutions and services to intelligence and federal/civilian agencies.It also offers data intelligence solutions to defend against national-scale threats, protect their networks, and data against attacks; security and intelligence solutions to the United Kingdom government and allied international governments; anti-fraud and regulatory compliance solutions; and enterprise-level data and digital services.The Platforms & Services (US) segment manufactures combat vehicles, weapons, and munitions, as well as provides ship repair services and the management of government-owned munitions facilities.

The Air segment develops, manufactures, upgrades, and supports combat and jet trainer aircraft.The Maritime segment designs, manufactures, and supports surface ships, submarines, torpedoes, radars, and command and combat systems; and supplies naval gun systems.It also supplies naval weapon systems, missile launchers, and precision munitions.

The company was founded in 1970 and is based in Farnborough, the United Kingdom.

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1.b. Last Insights on BA

BAE Systems' recent momentum is driven by a robust demand outlook and resilient revenue streams. The company's backlog strength and recent contract wins, including a $390 million deal to produce Bradley A4 Fighting Vehicles and a $198.4M deal for Armored Multi-Purpose Vehicles, have bolstered investor confidence. Analysts cite a steady drumbeat of major defense contract wins as a key driver of the stock's performance. The company's fair value estimate has been nudged down to £21.01 per share, reflecting slightly more cautious assumptions around future cash flows.

1.c. Company Highlights

Last Price	2137
Change Percentage	-1.29%
Open	2145
Previous Close	2165
Market Cap ( Millions)	62311
Volume	4309773
Year High	2178
Year Low	1274.5
M A 50	1909.75
M A 200	1863.02

FCF Yield	3.72%
Dividend Yield	1.60%
ROE	18.23%
Debt / Equity	89.65%
Net Debt / EBIDTA	188.67%
Price To Book	5.44
Price Earnings Ratio	31.1
Price To FCF	26.89
Price To sales	2.2
EV / EBITDA	18.38

2. BAE Systems' Strong 2025 Results Driven by Record Order Backlog and Investment in R&D

BAE Systems reported a 10% increase in sales to GBP 30.7 billion and a 12% increase in underlying EBIT, driven by strong demand for its products. The company's order backlog reached a record GBP 84 billion, with GBP 37 billion in new orders. Earnings per share (EPS) also saw a double-digit increase, coming in at 0.3914, slightly below analyst estimates of 0.4055. The company's financial performance was characterized by a margin of 10.8%, with Group EBIT reaching GBP 3.3 billion. Free cash flow was GBP 2.2 billion, above guidance, and the company returned GBP 1.5 billion to shareholders.

Publication Date: Feb -19

                                    📋 Highlights
                                    Revenue & Profit Growth::
                                                Sales rose 10% to GBP 30.7B, with underlying EBIT up 12% to GBP 3.3B (10.8% margin), and EPS doubled.
Order Backlog::
                                                Record GBP 84B backlog, including GBP 37B new orders, with GBP 260B total backlog ensuring long-term growth visibility.
Free Cash Flow::
                                                GBP 2.2B generated in 2025, GBP 6B+ cash return to shareholders over 2026–2028, and GBP 1.3B+ free cash flow guidance for 2026.
Geographic & Sector Performance::
                                                U.S. business grew significantly; Maritime revenue hit GBP 6.8B (+11%), Air GBP 9.3B (+9%), and Electronic Systems GBP 8%.

                                

Segmental Performance

The company's business grew 15% with significant contributions from Maritime, Air, and Electronic Systems. Maritime revenue rose 11% to GBP 6.8 billion, driven by growth in submarine design work and Australian operations. The Air sector increased 9% to GBP 9.3 billion, with 17% growth in MBDA and continued growth in drone sales. Electronic Systems sales rose 8%, led by double-digit gains in EW sales and strong contributions from precision strike and sensing activities.

Guidance and Outlook

BAE Systems guides for 7-9% sales growth in 2026, with EBIT growth expected to exceed sales growth. The guidance assumes a 9-11% growth in profitability across the group, with earnings per share growth in line with EBIT. The company expects to exceed GBP 1.3 billion in free cash flow in 2026 and targets a 3-year cash delivery of over GBP 6 billion from 2026 to 2028.

Valuation

With a P/E Ratio of 30.71 and an EV/EBITDA of 18.18, the market appears to be pricing in a certain level of growth and profitability for BAE Systems. The company's ROE of 18.23% and ROIC of 8.71% indicate a strong ability to generate returns on equity and invested capital. The dividend yield of 1.62% and free cash flow yield of 3.77% provide a relatively attractive return for investors.

Investment and M&A

The company has invested heavily in research and development, with a record level of self-funded R&D expenditure. Its Electronic Systems business invested to modernize and expand its microelectronics center to triple production capacity for critical electronic components. BAE Systems is also focused on bolt-on opportunities, particularly in Electronic Systems, Europe, and the Nordic region, with a focus on areas such as drones and counter-drones for potential acquisitions.

Growth Prospects

The company's strong order backlog and continued investment in technology and innovation position it well for future growth. The U.S. business is expected to see increased CapEx, particularly in areas such as technology investments and capacity expansion. The company's Space & Mission Systems business has a record backlog of around GBP 8 billion, with double-digit sales growth expected in 2026.

3. NewsRoom

Parliament pension fund snubs Trident and invests in China

12:46

Source:

Nextech3D.ai’s Eventdex to power AI matchmaking at business event

Feb -20

Source:

Assessing BAE Systems (LSE:BA.) Valuation After Strong One Year And Five Year Shareholder Returns

Feb -19

Source:

Basic Materials Roundup: Market Talk

Feb -18

Source:

Basic Materials Roundup: Market Talk

Feb -18

Source:

This defence champion could rearm Britain – if Reeves would let it

Feb -18

Source:

FTSE 100 Live: Index powers to 10,700 as miners and defence firms climb

Feb -18

Source:

FTSE 100 Live: Index powers to new highs as CPI falls, miners and defence in demand

Feb -18

Source:

4. Business Breakdown

4.a. Revenues by Country

4.b. Revenues by Segment

5. Expected revenues mid-term growth (6.70%)

6. Segments

Defense, Space & Security

Expected Growth: 7.2%

The defense segment is expected to grow faster than the global average due to increasing demand for advanced military technologies and the need for governments to modernize their defense systems. The segment's strong backlog and ability to secure large contracts contribute to its higher growth rate.

Commercial Airplanes (incl. Boeing Capital)

Expected Growth: 6.5%

The commercial airplanes segment is expected to grow at a rate slightly below the global average due to the cyclical nature of the commercial aviation market and the impact of external factors such as fuel prices and airline profitability. However, the segment's diversified product lineup and strong order backlog help to mitigate these risks.

Global Services

Expected Growth: 7.5%

The Global Services segment is expected to grow faster than the global average due to the increasing demand for aftermarket services and the need for customers to optimize the performance of their aircraft and defense systems. The segment's diversified service offerings and strong customer relationships contribute to its higher growth rate.

Unallocated Items, Eliminations and Other

Expected Growth: 0.0%

The growth rate for this segment is expected to be zero as it is not a operating segment and its financial performance is not directly related to the company's core business activities.

7. Detailed Products

Electronic Warfare

BAE Systems' Electronic Warfare (EW) solutions provide advanced capabilities to detect, identify, and counter threats across the electromagnetic spectrum.

Cyber Security

BAE Systems' Cyber Security solutions provide advanced threat detection, incident response, and penetration testing to protect against cyber threats.

Autonomous Systems

BAE Systems' Autonomous Systems solutions provide advanced autonomous capabilities for land, sea, and air platforms.

Combat Vehicles

BAE Systems' Combat Vehicles solutions provide advanced armored vehicles for military forces around the world.

Naval Ships

BAE Systems' Naval Ships solutions provide advanced warships and submarines for naval forces around the world.

Intelligence, Surveillance, and Reconnaissance (ISR)

BAE Systems' ISR solutions provide advanced sensors and analytics for military and civilian customers.

Training and Simulation

BAE Systems' Training and Simulation solutions provide advanced training systems for military and civilian customers.

Head-Mounted Displays

BAE Systems' Head-Mounted Displays solutions provide advanced helmet-mounted displays for military pilots.

Communication Systems

BAE Systems' Communication Systems solutions provide advanced communication networks for military and civilian customers.

8. BAE Systems plc's Porter Forces

Forces Ranking

Threat Of Substitutes

BAE Systems plc has a moderate threat of substitutes due to the presence of alternative defense contractors and the ability of governments to develop their own defense capabilities in-house.

Bargaining Power Of Customers

The bargaining power of customers is low due to the specialized nature of defense products and the limited number of major customers, primarily governments.

Bargaining Power Of Suppliers

The bargaining power of suppliers is moderate due to the presence of a few large suppliers of critical components and the potential for supply chain disruptions.

Threat Of New Entrants

The threat of new entrants is low due to the high barriers to entry, including significant capital requirements, regulatory hurdles, and the need for specialized expertise.

Intensity Of Rivalry

The intensity of rivalry is high due to the competitive nature of the defense industry, with several major players competing for a limited number of contracts.

9. SWOT Analysis

10. Capital Structure

10.a. Balance Sheet

10.b. Weighted Average Cost of capital

	Value
Debt Weight	33.24%
Debt Cost	5.76%
Equity Weight	66.76%
Equity Cost	5.76%
WACC	5.76%
Leverage	49.80%

11. Quality Control: BAE Systems plc passed 7 out of 9 key points

Strong Liquidity

Low Debt

Strong Interest Coverage

Healthy Cash Flow

Operating Efficiency

Strong Return On Equity

Consistent Revenue Growth

Consistent Operating Cash Flow Growth

Margin Improvement

12.a Historical Valuation

12.b Price/Earnings Ratio

12.c Margin Valuation

12.d Peers Valuation

Peers Group Analysis

Safran

A-Score: 5.0/10

Value: 1.1

Growth: 4.1

Quality: 7.3

Yield: 0.6

Momentum: 8.5

Volatility: 8.3

1-Year Total Return ->

Thales

A-Score: 5.0/10

Value: 1.9

Growth: 5.0

Quality: 4.2

Yield: 3.1

Momentum: 10.0

Volatility: 5.7

1-Year Total Return ->

Airbus

A-Score: 5.0/10

Value: 1.9

Growth: 5.6

Quality: 5.2

Yield: 1.2

Momentum: 8.5

Volatility: 7.3

1-Year Total Return ->

BAE Systems

A-Score: 4.9/10

Value: 2.4

Growth: 6.8

Quality: 4.9

Yield: 5.0

Momentum: 4.5

Volatility: 6.0

1-Year Total Return ->

Rheinmetall

A-Score: 4.9/10

Value: 0.2

Growth: 8.6

Quality: 6.2

Yield: 2.5

Momentum: 10.0

Volatility: 2.0

1-Year Total Return ->

Rolls-Royce

A-Score: 4.8/10

Value: 1.9

Growth: 6.4

Quality: 6.6

Yield: 0.6

Momentum: 9.5

Volatility: 3.7

1-Year Total Return ->

Peers Metrics

12.e Scoring ^Insights

12.f DCF ^BETA

Parameters

Short Term Growth

2.50%

Short term Time

10.0

Long-Term Growth

2.00%

WACC

5.76%

BAE Systems plc - GB0002634946

1. Company Snapshot

1.a. Company Description

1.b. Last Insights on BA

1.c. Company Highlights

Less Volatile

Strong Momentum

Higher Growth

Earnings Beats

Revenues Miss

Revenues Beats

Expensive

Fairly Valued

Stable Momentum

Average Yield

Average Growth

2. BAE Systems' Strong 2025 Results Driven by Record Order Backlog and Investment in R&D

Segmental Performance

Guidance and Outlook

Valuation

Investment and M&A

Growth Prospects

3. NewsRoom

4. Business Breakdown

4.a. Revenues by Country

4.b. Revenues by Segment

5. Expected revenues mid-term growth (6.70%)

6. Segments

Defense, Space & Security

Expected Growth: 7.2%

Commercial Airplanes (incl. Boeing Capital)

Expected Growth: 6.5%

Global Services

Expected Growth: 7.5%

Unallocated Items, Eliminations and Other

Expected Growth: 0.0%

7. Detailed Products

Electronic Warfare

Cyber Security

Autonomous Systems

Combat Vehicles

Naval Ships

Intelligence, Surveillance, and Reconnaissance (ISR)

Training and Simulation

Head-Mounted Displays

Communication Systems

8. BAE Systems plc's Porter Forces

Forces Ranking

Threat Of Substitutes

Bargaining Power Of Customers

Bargaining Power Of Suppliers

Threat Of New Entrants

Intensity Of Rivalry

9. SWOT Analysis

Strength

Weaknesses

Opportunities

Threats

10. Capital Structure

10.a. Balance Sheet

10.b. Weighted Average Cost of capital

11. Quality Control: BAE Systems plc passed 7 out of 9 key points

12.a Historical Valuation

12.b Price/Earnings Ratio

12.c Margin Valuation

12.d Peers Valuation

Peers Group Analysis

Peers Metrics

12.e Scoring Insights

12.f DCF BETA

Parameters

Short Term Growth

Short term Time

Long-Term Growth

WACC

Target Price

21.37$

Current Price

21.37$

Potential

12.e Scoring ^Insights

12.f DCF ^BETA