# BAE Systems (BAESY)

Sector: Aerospace & defense

| Field | Value |
|---|---|
| Price | $102.49 |
| Fair value (Analysts) | $140.00 |
| Discount to fair value | 26.8% |
| Fair value uncertainty (Analysts) | Medium |
| Economic moat (Analysts) | Wide |
| LSEG analyst rating (1 strong buy to 5 strong sell) | 2 |
| Data as of | 2026-10-15 |
| Next earnings | 2027-02-18 (estimate) |

## In short

The market doubts that defense budgets will grow as long as BAE's record backlog suggests, and clear UK funding with growth on guidance can close the gap.

## Themes and gap

- Themes: Regulation and courts (regulation-legal)
- Gap type: Can close (closable)
- Why: The UK budget on October 28, 2026, the next Spending Review, and the February 2027 results show whether budgets support the record backlog.

## About

BAE Systems is a UK defense company and one of the largest defense contractors in the world. It builds combat aircraft parts and systems, warships and submarines, armored vehicles, artillery and ammunition, electronic warfare systems, and cyber and intelligence services. Its largest customers are the governments of the US, the UK, Saudi Arabia, and Australia. In the US, it works mostly through BAE Systems, Inc., which makes electronics such as the F-15EX warning system and vehicles such as the Amphibious Combat Vehicle. It makes money from long-term government contracts, which often give advance payments and steady cash flow. In the first half of 2026, sales were £15.8 billion, and its order backlog reached a record £84.0 billion at June 30, 2026. The American Depositary Receipt (BAESY) trades in the US and represents ordinary shares listed in London.

## Thesis

The market prices BAE Systems at a discount because it doubts that government defense budgets will grow as fast and as long as the backlog suggests. The shares fell about 20% from their March 2026 high, while the business kept growing. In the UK, the government must still fill a £4.7 billion gap in its Defence Investment Plan and say how it will reach defense spending of 3% of GDP. On October 6, 2026, The Times reported that the decision on the path to 3% could move to a Spending Review in October 2027. The Treasury called this "pure rumour and speculation". Talk of peace in Ukraine has also made defense stocks fall before. For the gap to close, three things must be true. BAE must meet its raised 2026 guidance: sales growth of 8% to 10%, underlying EBIT growth of 10% to 12%, and free cash flow above £2.0 billion. Order intake must keep the backlog near its record of £84.0 billion. The UK budget on October 28, 2026, and the next Spending Review must fund the Defence Investment Plan, and US and European budgets must keep orders for munitions, ships, and electronics high. The next checks are the UK budget on October 28, 2026, and the full-year 2026 results, expected in February 2027, with the 2027 guidance. If budgets hold, the gap can close over the next four to six quarters. If governments delay spending, the discount can last longer.

## Checkpoints

- Oct 28, 2026: UK budget: defense funding. Status: Pending. Watch: A budget that fills the £4.7 billion Defence Investment Plan gap or sets a path to 3% of GDP passes; a budget that leaves the gap open fails.
- Feb 18, 2027 (estimate): FY 2026 results and 2027 guidance. Status: Pending. Watch: 2026 sales growth of 8% to 10%, free cash flow above £2.0 billion, and 2027 guidance for more growth pass; results below guidance or flat 2027 guidance fail.

## Balance sheet

- Cash: £4.2B
- Debt: £7.4B
- Net debt: £3.2B
- Interest cover: 6.8×
- Debt due within 12 months: £701M
- Ratings: Fitch A- (stable outlook), Moody's A3

BAE Systems funds itself mostly with bonds and with advance payments from government customers. At June 30, 2026, loans and overdrafts were £7.4 billion, of which £0.7 billion was current, and cash was £4.2 billion. Net debt excluding leases, as the company states it, was £3.2 billion, down from £3.8 billion at December 31, 2025, because customer advances raised free cash flow to £1.8 billion in the first half. Debt excludes £1.8 billion of lease liabilities. Interest cover is IFRS operating profit divided by net finance costs for the first half of 2026. The pension plans were in an accounting surplus at June 30, 2026. The company's policy is to keep an investment-grade rating. The Fitch rating is from its May 13, 2026 action, and the Moody's rating is from the FY 2025 results.

As of 2026-06-30.

Sources:

- https://www.investegate.co.uk/announcement/rns/bae-systems--ba./half-year-financial-report/9694659
- https://www.investegate.co.uk/announcement/gnw/bae-systems--ba./bae-systems-2026-half-year-results/9695791
- https://www.placera.se/telegram/bae-systems-fitch-affirms-bae-systems-rating-outlook-stable-20260513

## Recent events

- 2026-10-06: The Times reported that the UK government may delay its decision on how to raise defense spending to 3% of GDP, possibly to a Spending Review in October 2027. The Treasury said that the date of the Spending Review is not set and called the report "pure rumour and speculation".
- 2026-10-02: The US Department of War announced, on September 30 and October 2, six contract actions for BAE Systems worth about $656 million. The largest was $230 million for 32 Amphibious Combat Vehicle recovery variants, and another was $147 million for F-15EX electronic warfare hardware.
- 2026-07-30: BAE Systems reported H1 2026 results. Sales were £15.8 billion, up 9%, and underlying EBIT was £1.7 billion, up 11%. Underlying EPS was 38.9p, up 13%. Order intake was £16.4 billion, and the backlog reached a record £84.0 billion. It raised its 2026 guidance for sales, EBIT, and EPS, and raised its free cash flow guidance to more than £2.0 billion. It declared an interim dividend of 15.0p, payable on December 2, 2026.
- 2026-07-30: BAE Systems said that it signed a seven-year framework agreement with the US Department of War to expand production of THAAD missile seekers.
- 2026-05-13: Fitch affirmed the A- long-term rating of BAE Systems with a stable outlook.

## Risks

- High: BAE Systems depends on government budgets. A delay in the UK path to 3% of GDP, a gap in the Defence Investment Plan, or a change in US budget priorities can slow new orders.
- Medium: Peace talks in Ukraine or a lower threat level in Europe and the Middle East can lower the price that investors pay for defense stocks, even if contracts stay in place.
- Medium: Large programs, such as submarines and warships, are complex and long. Cost overruns or delays on fixed-price work can reduce profit.
- Medium: Sales to Saudi Arabia and other export customers depend on government export licenses and politics. A change in UK or US export policy can stop deliveries.
- Low: BAE reports in pounds, but a large part of its profit is in US dollars. A weaker dollar lowers its reported sales and profit, and the ADR price also moves with the exchange rate.

## Links

- Page: https://picks.kamadorueda.com/company/BAESY/
- History of changes: https://picks.kamadorueda.com/company/BAESY/history/
- JSON with full history: https://picks.kamadorueda.com/data/company/BAESY.json

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