ii view: BAE Systems upgrade demonstrates strong demand
The company has exposure to areas like electronic systems, although automated warfare is asking questions of more traditional military equipment. Analyst Keith Bowman assesses prospects.
12th November 2026 11:57
by Keith Bowman from interactive investor
10-month trading update to 31 October
- Order intake of £33 billion, up from £27.2 billion this time last year
Guidance:
- Continues to expect annual sales growth of 8-10% (2025: £30.7 billion)
- Continues to expect growth in annual adjusted profit (EBIT) of 8-12% (2025: £3.3 billion)
- Now expects annual free cash flow of around £3 billion, up from more than £2 billion previously
Chief executive Charles Woodburn said:
“We've delivered strong financial and operational performance year to date, as well as positive order intake momentum.
"Our substantial backlog provides good visibility and, with our portfolio aligned to evolving threats and customer priorities, we remain well positioned to deliver sustainable growth over the years ahead.”
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ii round-up:
BAE Systems (LSE:BA.) today reported year-to-date orders of £33 billion, driven by exposure to US munitions and air defence systems.
Orders of £16.5 billion since the end of the first half now see expected annual free cashflow raised to around £3 billion. That compares with a previous estimate of more than £2 billion.
Shares in the FTSE 100 company gave up early gains having come into this latest news up by just over a tenth so far in 2026. That’s similar to the FTSE 100 index. Rival Babcock International Group (LSE:BAB) is down by close to a fifth year-to-date.
BAE flagged positive demand for areas such as Electronic Systems and Air and Platform Services, but more subdued demand and profit margins for Maritime navy vessels.
The maker of components for the Typhoon and F-35 fighter jets maintained annual sales and profit guidance, but pointed to likely further order wins before the end of the year.
Annual sales are expected to climb between 8% and 10% from last year’s £30.7 billion, pushing adjusted profits up by 8% to 12% compared to £3.3 billion in 2025.
Notable recent order wins include £3.1 billion in Air and $0.5 billion of funding towards aiding US ordnance production.
Broker Morgan Stanley reiterated its ‘overweight’ stance on BAE post the news, flagging the stock as a ‘top pick’, although it downgraded its price target to £25 from £26.20, driven by a lower mark-to-market of peer multiples.
Results for the year to 31 December are due to be announced on 19 February.
ii view:
Headquartered in London, BAE employs more than 100,000 people across more than 40 countries. Electronic systems and Air products are expected to generate most profit this financial year at around a third each. That’s followed by Platforms and Services at close to a fifth, Maritime a tenth, and Cyber and Intelligence the balance of around 5%.
Geographically, the US remained the largest customer over its last financial year at almost a half of all sales. The UK came next at just over a quarter, with other big customers including Saudi Arabia at around a tenth. Global competitors include Rheinmetall AG (XETRA:RHM), Northrop Grumman Corp (NYSE:NOC) and Lockheed Martin Corp (NYSE:LMT).
For investors, ethical concerns may deter some investors from buying BAE shares. The changing nature of war sees the City downgrading Maritime profit by around 6% in 2026. A negative reaction to the Democrat sweep in the US midterm elections shows how political developments can influence sector sentiment. A forward price/earnings (PE) ratio above the three- and 10-year averages may suggest the shares are not obviously cheap, while historically, defence spending has been easier to cut than that of health or education.
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On the upside, a series of European governments including the UK have promised to increase defence spending given the heightened threat from Russia and reduced willingness of the US to defend Europe. The war on Iran means the US must replenish its store of munitions. Diversity of both product and geographical region exists, while the dividend payment has risen consecutively for more than 20 years, leaving the shares on dividend yield of around 2%.
In all, and despite the changing nature of warfare, a consensus analyst estimate of fair value above £23 per share implies further upside for the global defence giant.
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:
Cautious buy
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