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BAE Systems (LSE:BA.) shares keep on rocketing in value. At £23.27 per share, the FTSE 100 stock is up 15% over the past month, and 33% over a 12-month horizon.
I think the defence giant could keep on soaring. Here are just four reasons why.
1. Rising instability
War in the Middle East has supercharged BAE Systems’ share price more recently. But it’s not an isolated conflict of course — Russia’s invasion of Ukraine four years ago kicked off this new age of geopolitics, and with it the defence sector boom.
Things threaten to become more unstable, too, driving weapons spending steadily higher. Fears over Chinese and Russian expansionism in the West continue to grow. And this week, President Trump said the US could soon be “taking over” Cuba following its recent operations in Iran and Venezuela.
2. European boost
Spending might remain especially high on the agenda for European countries, which could be to the benefit of local companies like BAE Systems. European defence budgets soared 17% in 2024, according to latest statistics. But with arsenals still well below Cold War levels, there remains significant scope for further growth.
Concerns over dwindling US support for NATO is also boosting spending by European nations. These fears rose again this week after Trump’s comments that NATO faces a “very bad” future if America’s allies fail to help its Middle East operations. Against this backcloth, continental defence budgets only appear to be heading one way.
Defence spending is especially high on the agenda in the UK, which — as one would expect — should be especially beneficial for British contractors. As for BAE Systems, it sources 27% of revenues from the Ministry of Defence.
However, the company’s geographic footprint is extensive, which is a major advantage in my opinion. As a major seller to the US, Australia, Saudi Arabia, and Mainland Europe, too, it’s not dependent on one territory to drive earnings. Given the rising strain on the UK’s public finances, this is a major advantage in my view.
4. Discount valuation
Though it has soared in value, BAE Systems’ shares still trade at a discount to the broader European defence industry. At 25.2 times, the company’s price-to-earnings (P/E) ratio sits below an average of 35-36 for its continental peers. This could help the Footsie contractor outperform the sector.
Sure, BAE’s P/E is more than double the FTSE 100 average as well. But I think this premium valuation is deserved given the industry outlook.
Bottom line
Having said that, BAE Systems faces significant challenges that could impact the share price. Supply chain issues remain, and could in fact worsen depending on geopolitical developments. It also faces immense competition from other industry heavyweights to grow earnings.
So are BAE Systems shares a buy, then? I think they’re worth serious consideration, and especially given the stock’s ability to thrive despite those pressures I’ve described (underlying sales and earnings jumped 10% and 12% in 2025). On balance, I think it’s one of the hottest FTSE 100 growth shares right now.
