BAE Systems (LSE:BA.) Wins New Naval Gun Contract, Is The Stock Still Undervalued?

BAE Systems (LSE:BA.) has been in focus after receiving a contract to supply two Bofors 40Mk4 naval gun systems to the Brazilian Navy, drawing fresh attention to the defence group and its stock.

See our latest analysis for BAE Systems.

These contract wins and product announcements come as BAE Systems trades at £19.24, with a 7-day share price return of 6.12% and a 30-day share price return of 6.24%. Its 3-year total shareholder return of 122.97% and 5-year total shareholder return of 291.03% highlight strong longer term momentum, despite a recent 90-day share price return that declined 7.50%.

If you are interested in other defence and security suppliers exposed to similar themes, this is a good moment to look at 33 robotics and automation stocks

BAE Systems looks like a robust defence business, backed by sizeable revenue and profit, and the recent share price bump keeps it in the spotlight. The real question now is how much of that strength is already in the £19.24 price.

Most Popular Narrative: 17.2% Undervalued

The most followed narrative for BAE Systems puts fair value at £23.23 per share versus the current £19.24, framing the current price as a discount grounded in detailed earnings and cash flow assumptions.

The company's order backlog has surged to £75 billion, with a pipeline of new opportunities partly fueled by higher defense spending commitments across NATO, the US, UK, Europe, and Indo-Pacific (for example, the UK targeting 3.5% of GDP on defense by 2035 and Japan doubling spending by 2027). This is described as providing visibility on future revenues and is used to support expectations of stronger topline growth over multiple years.

Read the complete narrative.

Want to understand why this narrative points to a higher fair value for BAE Systems? The core argument links a very large backlog, firm revenue growth expectations, and firmer profit margins to a future earnings profile that supports a richer multiple than many investors might assume at first glance.

Result: Fair Value of £23.23 (UNDERVALUED)

Have a read of the narrative in full and understand what's behind the forecasts.

However, this BAE Systems narrative could be knocked off course if major government contracts are reduced, or if ESG driven investor pressure meaningfully lifts funding costs.

Find out about the key risks to this BAE Systems narrative.

Another View: What BAE Systems’ P/E Ratio Is Telling You

There is a different message in BAE Systems’ current P/E of 26.4x. It sits below the estimated fair ratio of 32x and below the European Aerospace & Defense average of 30.6x, yet above the narrower peer group at 21.2x. That mix hints at both valuation support and some risk if sentiment cools, so how comfortable are you with paying up for this earnings profile?

See what the numbers say about this price — find out in our valuation breakdown.

Next Steps

Whether you are impressed or cautious about the sentiment around BAE Systems so far, it can be useful to review the details yourself, consider the positive drivers that others are watching, and then check the 3 key rewards

Looking for more investment ideas beyond BAE Systems?

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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