BAE Systems Shares (LON: BA) Riding High, What is Driving The Move?

BAE Systems shares (LON: BA) have been a huge outperformer so far this year, with gains of 46.73% YTD a far cry from 2024, where the price gained single digits.

The British multinational arms, security, and aerospace company, finds itself at a fascinating juncture, driven by increased global defense spending, a solid order book, and strong financial performance. However, a closer examination reveals a complex picture, with both opportunities and potential headwinds to watch for.

The driving force behind this rally is, unsurprisingly, the changing geopolitical landscape. The ongoing war in Ukraine and rising tensions in other regions have spurred a significant increase in defense budgets globally, particularly in Europe.

BAE Systems, with its strong presence in key markets and a diversified portfolio of defense products and services, is well-positioned to capitalize on this trend. Recent financial results reflect this positive momentum. The company reported strong full-year 2024 results, with revenue up 14% to £26.3 billion and net income rising 5.3% to £1.96 billion. A record order backlog (£77.8bn as of Feb.19, 2025) provides significant revenue visibility for the coming years.

The company's recent contract wins further solidify its outlook. These include:

• Deals with Irving Shipbuilding Inc. for Canada's River-class destroyer program.
• A naval gun system contract for the Colombian Navy.
• A substantial $356 million UK contract to enhance warship threat detection capabilities.

These wins, coupled with a £2 billion UK government initiative to bolster defense exports, paint a picture of sustained demand for BAE Systems' offerings.

This strong operational performance is also underpinned by the shares' impressive moving averages; the stock is currently trading well above both its 50-day (1,332.588p) and 200-day (1,297.953p) moving averages, with the 50 day having crossed the 200 MA representing a clear bullish signal for technical traders. A 5-year change that has delivered gains of 260.11% highlights the long-term growth that has been seen in the stock.

Valuation and Analyst Perspectives

However, the picture isn't entirely without its nuances. While BAE Systems delivered strong results, the profit margin for the full year 2024 decreased slightly, from 8.0% in 2023 to 7.4%, due to increased expenses. Furthermore, a modest decrease in free cash flow was noted, a metric that investors will be watching closely in future reports.

Perhaps the most pressing question for investors is valuation. With a P/E ratio above 25, BAE Systems is trading at a premium compared to its historical levels and some of its peers. This indicates that a significant amount of future growth is already priced into the stock.

Analyst consensus, while generally positive with a “Buy” rating, presents a mixed view on the price target. The average analyst target price sits around 1,554p, notably below the current trading price, suggesting some analysts may believe the stock may be overvalued in the short term, or have yet to catch up with the current rate of acceleration in BAE.

The dividend, with a trailing twelve-month yield of 1.99% and an upcoming ex-dividend date of April 17, 2025, provides a modest income stream for investors. The ongoing share repurchase program also signals management's confidence in the company's value and its commitment to returning capital to shareholders.

Looking ahead, BAE Systems faces both opportunities and risks. Continued growth in global defense spending and successful execution on its existing order backlog could drive further upside. The company's exposure to the US market, however, presents a potential vulnerability.

The upcoming half-year 2025 earnings release on August 4th, 2025, and the Annual Shareholder Meeting on May 13th, 2025, will provide crucial insights into the company's operations, and its ability to navigate the challenges and opportunities ahead. Until then, up in the territory of all-time-highs, there is a period of price discovery that will need to play out in the absence of support/resistance levels to watch.