BAE Systems’ (LSE: BA) share price has dropped 14% from its 18 March one-year high of £23.59. That looks to be the product of market optimism that the global security situation is improving.
But this looks misplaced to me, however much we might want it. And even if it is not just wishful thinking, NATO countries have already committed to massive multi-year defence spending increases.
That means they will be spending roughly $4.2trn (£3.1bn) by 2035 — 64% more than today. And as Europe’s largest defence firm and the world’s sixth largest, BAE Systems is perfectly positioned to benefit from that.
How’s the order book looking right now?
BAE’s 30 July-released H1 2026 results showed new orders rose 24% year on year over the period to £16.4bn. And the order backlog stood at £84bn. These figures — and the several enormous multi-year deals included within them — provide exceptional earnings visibility for the firm going forward.
The latest were a $1.96bn precision weapons sale to Saudi Arabia and a £135m torpedo contract for the UK’s Royal Navy.
Just before this, there was a £4.6bn contract to advance the GCAP fighter jet, along with Italy’s Leonardo and Japan’s Mitsubishi Heavy Industries.
How have these fed through to earnings?
Over H1, BAE’s sales climbed 9% to £15.8bn, while its underlying earnings before interest and tax jumped 11% to £1.7bn. This pushed earnings per share 13% higher to 38.9p, and free cash flow to £1.8bn.
Sustained rises in earnings are ultimately the key driver for increases in any company’s share price. A risk here for BAE is any failure in one of its key systems that could be expensive to fix. Another is any change in the completion scheduling for any of its key contracts that could reduce short-term margins.
Nonetheless, analysts project that BAE’s earnings will keep growing by an annual average of 11.8% to end-2028 at minimum.
How does the valuation line up with peers?
Given all this, the firm looks extremely undervalued across all the key relevant measures. For example, it’s bottom of its competitor group on the price-to-sales ratio — at 2 versus the peer average of 4.3. These firms comprise L3Harris Technologies at 2.2, RTX at 3, Rolls-Royce at 5.4, and TransDigm at 6.6.
BAE also looks very undervalued on its price-to-earnings ratio of 28.5 against its competitors’ average of 34.8. And there also looks a major price-to-valuation mismatch in its 4.9 price-to-book ratio compared to its peers’ 16.8 average.
My investment view
This combination of surging multi‑year orders, strong earnings momentum, and deep long‑term cash flow visibility makes the current valuation look increasingly out of step with reality.
The market’s pricing in a gentler global security backdrop. But the spending commitments already locked in by NATO tell a very different story.
With BAE undervalued on every major metric, that disconnect offers long‑term investors a rare opportunity to consider. And with earnings set to keep rising, the share price looks well positioned to catch up with the fundamentals.
I for one will be adding to my holding in the stock at the earliest opportunity. And other deeply undervalued shares in other sectors have also recently caught my eye.
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Simon Watkins owns shares in BAE Systems and Rolls-Royce.
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