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BAE Systems’ (LSE: BA) shares have dipped 7% from their 5 June one-year traded high of £19.98.
This is despite the release on 30 July of seemingly strong H1 2025 results. Consequently, I think this might be a great time for me to buy more of the stock.
To find out if it is, I checked that good value remains in the shares and that nothing untoward lurked in the results.
Is there anything wrong in the results?
In H1, year-on-year sales jumped 11% to £14.621bn, and underlying earnings before interest and tax (EBIT) leapt 13% to £1.55bn. EBIT outperformed consensus analysts’ forecasts of £1.52bn. Meanwhile, earnings per share (EPS) also increased – by 12%, to 34.7p.
One element that may have contributed to the share price dip was that order intake fell 13%, albeit to £13.2bn. That said, its order backlog fell from a record high £77.8bn in H1 2024.
This suggests to me a subtle shift in focus to executing existing contracts rather than booking new ones at the same pace.
However, I think this is eminently sensible, as a risk to the firm remains sales growth outpacing that of production. This could lead to a delay in contract fulfilment that could damage its reputation.
The business outlook
The underlying strength of its order pipeline was highlighted to me by the upgrading of full-year sales and EBIT guidance.
More specifically, the firm now expects sales growth of 8%-10% this year, up from 7%-9%. And it forecasts EBIT to increase 9%-11%, from 8% to 10% previously.
It was also evident in the size and quality of contracts over the period and newer contracts announced.
H1, for example, saw £1bn of funding received for concept and assessment work on the Global Combat Air Programme. It also secured a $1.2bn (£0.9bn) contract to provide the US Space Force with space-based missile tracking capabilities.
Since then, the US State Department has approved $330m of air defence sales to Ukraine. BAE Systems is one of the contractors for this.
It is also heavily involved in the AUKUS programme – the security pact between Australia, the UK and the US focused on the Indo-Pacific region. The UK government said in late July that it will deepen its AUKUS nuclear submarine partnership with Australia through a new 50-year treaty. This is expected to be worth up to £20bn in UK defence exports over the next 25 years.
Overall, consensus analysts’ forecasts are that BAE Systems’ earnings will increase 11.2% each year to the end of 2027. And it is ultimately this growth that drives any firm’s share price (and dividends) over time.
So is there value left in the shares?
BAE Systems’ price-to-sales ratio of 2 is bottom of its peer group, which averages 5.1.
These firms comprise L3Harris Technologies at 2.4, RTX at 2.5, Rolls-Royce at 4.7, and TransDigm at 10.8.
It is also undervalued at a price-to-earnings ratio of 27.7 compared to its competitors’ average of 33.3. And the same applies to its 5.1 price-to-book ratio against its peers’ average of 14.7.
A discounted cash flow analysis pinpoints that BAE Systems’ shares are 22% undervalued at their current £18.54 price.
Therefore, their fair value is £23.77.
Consequently, I will buy more of the stock as soon as possible.
