I’m not afraid to admit that I sold my BAE Systems (LSE:BA.) stock before Russia invaded Ukraine. The stock was up 20% and the Russians (state employees) who I worked with at the time were convinced that there wouldn’t be a war. They were wrong. The BAE Systems share price surged. And it’s never looked back.
It’s a bit of a shame for me. But conversely, I’m not too upset as I essentially would have been a net beneficiary of the three years of conflict and the associated increased defence spending. I’m not overly moralistic when I invest, but maybe there would have been a bit of guilt.
Nonetheless, the stock is now trading at levels I certainly didn’t expect to see. In addition to stronger operational performance, the stock is now trading at multiples that I wouldn’t typically expect to see from a UK-listed defence stock.
A quality stock
Today, BAE Systems is undoubtedly a quality stock due to its positioning in global defence, strong order book, and deep customer relationships. As the UK’s only nuclear submarine manufacturer and a key supplier of advanced fighter jets, naval vessels, and armoured vehicles, BAE enjoys a unique moat — often serving as the sole provider for critical military platforms like the Astute-class submarines and Typhoon fighters.
Its customer base is a who’s who of global defence, led by the US Department of Defense and UK Ministry of Defence, but also including Saudi Arabia, Australia, and other NATO allies. This diversity provides resilience and access to the world’s largest defence budgets.
The company’s record £77.8bn order backlog ensures multi-year revenue visibility, underpinning reliable cash flows and a progressive dividend. With long-cycle contracts, high barriers to entry, and entrenched positions in next-generation programmes, BAE’s competitive advantages are both structural and enduring. This can make it a core holding for quality-focused investors.
In other words, it’s probably worth of a premium.
And it comes at a premium
BAE Systems’ valuation reflects a clear market premium for its sector leadership and earnings visibility. The forward price-to-earnings (P/E) ratio stands at 27.1 times for 2025. This eases to 24.3 times in 2026 and 21.7 times by 2027 as earnings catch up with share price gains.
The price-to-book (P/B) ratio remains elevated, at 4.67 times in 2025 and 4.02 times by 2027, while enterprise value to revenue multiples are 2.11 times in 2025 and 1.82 times in 2027. Meanwhile, the dividend yield sits around 1.85% for 2025, rising to 2.25% by 2027.
Net debt, while rising to £6.8bn in 2025, is projected to decline steadily. These premium multiples underscore investor confidence in BAE’s order backlog, unique market position, and long-term cash generation, even if the shares are no longer a bargain.
I wouldn’t expect the stock to appreciate particularly quickly. However, with geopolitics providing multiple catalysts in the last year, I wouldn’t bet against it.
For me, even though it’s a good quality stock, BAE doesn’t fit my current investment criteria. And while it’s certainly worthy of consideration, my industrials preference has quickly shifted to Melrose Industries.
