The large European business of UK-based defense contractor BAE Systems (BAESY) looks poised to strengthen a great deal going forward, while the company has a very large order backlog and its valuation is quite low. Also importantly, the company reported strong financial results for 2024.
On the other hand, a sizable portion of the company’s U.S. business, which accounts for nearly 50% of its revenue could be negatively affected by the upcoming budget cuts. But the firm does have significant exposure to areas in which the White House is looking to invest more funds.
In light of all of these points, investors looking for exposure to a large European-based defense company should consider buying BAE Systems’ shares.
BAE’s European Revenues Should Surge Going Forward
With Europe beginning to boost its defense spending amid strong urging to do so from President Donald Trump and continued fears of Russia, BAE Systems has landed some large orders in recent months from European countries.
For example, on April 9, BAE disclosed that it had obtained a $300 million order from Sweden for 18 mobile howitzers. BAE indicated that Sweden intends to provide the howitzers to Ukraine.
And last December, the UK-based firm received a huge $2.5 billion contract from Denmark and Sweden. Under the deal, it will provide its CV90 combat vehicles to the Scandinavian countries. Further, in January, BAE disclosed that it would be paid 285 million pounds by the UK to enhance the country’s Navy.
On BAE’s earnings call held in February, the company stated that “paradigm shifts in European security could drive significantly increased defense spending over the medium term. And as Europe’s largest defense company, we are well placed to support our government customers as they confront these challenges. “
A Look at BAE’s Financial Results and Valuation
Last year, BAE’s revenue jumped 14% to 28.3 billion pounds, while its backlog advanced 11% to a record 78 billion pounds and its underlying earnings before interest and taxes rose 14% to a record total of over 3 billion pounds.
On the valuation front, BAESY stock is changing hands at a forward price-to-earnings ratio of 24.7 times. Meanwhile, analysts, on average, expect the firm’s earnings per share to jump nearly 11% this year and another 13% in 2026. Given the firm’s large forecasted growth rates, the valuation of its stock is quite attractive.
Some Shielding From Trump Administration Budget Cuts
As of April 10, Secretary of Defense Pete Hegseth had announced about $6 billion of budget cuts at the Pentagon. BAE Systems could in theory have some exposure to these cuts and/or future spending reductions by the agency.
However, Hegseth seems so far to be targeting (as he put it) “ancillary things like consulting and other nonessential services,” while BAE, of course, specializes in delivering weapons systems and other hardware.
Further, Hegseth has indicated that he is looking to prioritize a number of areas in which BAE specializes, including cybersecurity, drones, submarines, and missile defense. Going forward, BAE could certainly increase the amount of revenue it obtains from the Pentagon related to these areas.
*This article is intended to be informational only; it is not financial advice.
