Are £21 BAE Systems shares still undervalued?

[ad_1]

What’s going on with BAE Systems (LSE: BA.) shares? The company just posted its full-year earnings for 2025 and I think it’s fair to say, it was a good year. The order backlog rose further. Earnings were up 12%. Sales up 10%. This came on the back of confirmed contracts with the RAF and US Navy too. All the good news resulted in an impressive 10% increase to the dividend.

How did all that affect the share price? It dropped 2%, taking a billion pounds or so worth of market value off the company. Crikey.

Heightened threats

The reason for this discrepancy is likely a simple one: good results were priced in. A common stock market saying applies here: buy the rumour, sell the news. The general idea is that share prices often rise on high expectations and some investors sell to realise some profit.

I think a better strategy for would-be investors is to zoom out and look at the big picture. Is this an undervalued buy today? Can BAE Systems continue the momentum that has seen the share price surge 341% in the last five years? Is this stock likely to achieve above-average returns for years to come?

Before getting to my answer to those questions, I will say that a phrase from the yearly reports caught my eye. It was “heightened threat environment”. This euphemism feels particularly pertinent coming only days before two fresh conflicts erupted in the Middle East and Asia.

The reality of investing in a defence company is that heightened threats mean more orders. It’s no surprise that BAE Systems has acquired a record order backlog in the last few years. Many investors may wish to steer clear here on ethical grounds.

At the same time, it’s hard not to see this state of affairs being the norm now. The ‘peace dividend’ era in which we all hoped war might slowly become a thing of the past looks like a pipe dream given recent events. It seems it’s impossible to put this particular toothpaste back in the tube.

More spending

The consequence of all this is that military spending is on the rise. NATO members have been allocating billions to upgrading their kit and this is the main cause of BAE Systems’ increased order backlog. It’s a trend that may still be in the early stages.

Some estimates have Britain doubling defence spending by the 2030s. A certain Mr Trump has spoken of an extra half trillion dollars needed in the coming years. The UK and the US, by the way, are BAE Systems’ two biggest customers.

There are no guarantees, of course. If tensions soften (as I’m sure we’re all hoping for) in the years ahead then governments will be relieved to not have to make difficult budget decisions like the above. Overall, however, I think BAE Systems shares are worth considering today.

The post Are £21 BAE Systems shares still undervalued? appeared first on The Motley Fool UK.

More reading

• 3 easy steps I’m taking to prepare for a stock market crash
• Are red-hot BAE Systems and Babcock shares simply unstoppable now?
• 2 top UK defence shares and an ETF to consider buying as geopolitical instability hits the stock market
• As the ISA deadline looms I asked ChatGPT if it’s better to invest in a SIPP instead and it said…
• See the surprising Babcock, Rolls-Royce, and BAE Systems share price forecasts for the next 12 months

John Fieldsend has positions in BAE Systems. The Motley Fool UK has recommended BAE Systems. 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.

[ad_2]

Source link