ii view: BAE Systems still has higher sales and profit in sight

AGM trading update 

• Continues to expect full-year 2025 revenues to growth between 7% and 9%
• Continues to expect full-year adjusted profit (EBIT) to growth between 8% and 10%

Chief executive Charles Woodburn said: 

“During this time where the defence and security landscape is rapidly evolving, we are focused on delivering our long-term programme commitments to our customers, while investing in our business to boost capacity, drive efficiencies and shape our portfolio to support future growth."

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ii round-up:

BAE Systems (LSE:BA.) today flagged a strong start to the current financial year, with the maker of defence equipment maintaining estimates for growth in sales and profits provided in February.

A market backdrop of increased defence spending continues to support management estimates for growth in revenues for the 2025 year ahead of 7-9%, fuelling expected growth in adjusted profit of 8-10%. 

Shares in the FTSE 100 company drifted marginally lower in UK trading having come into this latest news up by just over a half since the start of 2025. That’s way ahead of a near 4% gain for the FTSE 100 index year to date, but below a 72% gain for fellow UK defence contractor Babcock International Group (LSE:BAB). 

BAE Systems makes an array of equipment from submarines to jet fighter components and armoured vehicles. Donald Trump’s return to power in January has subsequently seen him look to reduce America’s spending contribution to NATO, with European countries expected to spend more.

Notable BAE contract wins this year include a $356 million multi-purpose armoured vehicles deal and a near $300 million package for artillery equipment, including artillery location radar systems. 

BAE flagged the ongoing reshaping of its business portfolio to support future growth, with areas such as electronic warfare, laser-guided weapons and space solutions all now a focus. The group invested a record sum on research and development in 2024, with wider capital expenditure totalling over £1 billion. 

Although it's monitoring recently imposed US trade tariffs, most of the equipment BAE makes for US customers is manufactured in the US itself, with management therefore not expecting any material impact.  

Broker Morgan Stanley reiterated its ‘overweight’ stance on BAE shares post the news, increasing its estimate of fair value to 2,069p a share from 2,027p.

ii view:

Employing over 100,000 people in more than 40 countries, BAE reported sales of £28.3 billion in 2024, generating adjusted profit (EBIT) of £3 billion. Electronic systems and including night vision equipment made most profit in 2024 at 31%. That was followed by aircraft products at 30%, maritime equipment at 15%, platforms & services including vehicles and ammunition at 14%, and cyber & Intelligence products the balance.

Geographically, the US proved its largest market in 2024 at almost 48% of sales. The UK came in at close to 27%, with other big customers Saudi Arabia at 11% and Australia at 4%. Group rivals include Lockheed Martin Corp (NYSE:LMT) and Northrop Grumman Corp (NYSE:NOC).

For investors, ethical concerns may deter some investors from buying BAE shares. An estimated price/earnings (PE) ratio above the three- and 10-year averages may suggest the shares are not obviously cheap. Acquisitions and including its previous purchase of Ball Aerospace are not without risk, while exposure to currency movements should also not be overlooked. 

More favourably, a series of European governments, including the UK’s, have recently promised to raise defence spending given the potentially heightened threat from Russia and less reliable military support from the US. Diversity of both product and geographical region exists. The purchase of Ball Aerospace has widened its product portfolio into the space sector, while the dividend payment is progressive, rising more than 20 years in a row and leaving the shares on a forecast yield of around 2%. 

On balance, and in a highly uncertain world, this major defence contractor continues to justify its place in many already diversified investor portfolios. 

Positives: 

• Diversity of products and geographical sales
• Progressive dividend policy

Negatives:

• Arms manufacturing may generate ethical concerns
• Subject to government finances

The average rating of stock market analysts:

Buy