Key Morningstar Metrics for BAE Systems
- Fair Value Estimate: GBX 2,600
- Morningstar Rating: ★★★★
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
What We Thought of BAE Systems’ Earnings
BAE Systems BA. reported 2025 sales of £30.7 billion (10%-plus constant currency), underlying EBIT of £3.3 billion (12%-plus), and free cash flow of £2.2 billion, supported by a record backlog of £83.6 billion and order intake of £36.8 billion (book/bill of 1.2 times).
Why it matters: Growth was driven by structural volume expansion across electronics, combat vehicles, missiles, and submarines. Europe now represents 32% of the backlog but only about 11% of revenue, implying multiyear revenue conversion as rearmament budgets move from authorization to delivery.
- Electronic systems maintained 15.4% margins on higher electronic warfare and sensing deliveries, platforms and services benefited from armored multipurpose vehicle full-rate production, and the air segment reflected higher activity on Eurofighter Typhoons and GCAP, a next-generation fighter jet program.
- MBDA is entering the delivery phase after years of order buildup, with the backlog up about 150% since 2021, and production capacity expanded.
The bottom line: We raise our fair value estimate to GBX 2,600 after rolling the model and lifting midterm electronic systems’ margins by 1%, reflecting mix and scale. Revenue growth is underpinned by maintained US and European defense spending, rising electronic and missile content, MBDA backlog conversion, and long-cycle naval and combat air programs.
- BAE’s record £83.6 billion backlog reflects only a fraction of the economic value of its largest programs. Given its incumbent prime roles, design authority, and framework positions in submarines, combat air, and missiles, total long-cycle exposure is expected to extend to about £260 billion.
- Margin expansion is driven by mix shift toward electronics and weapons, scale benefits in land and air production, and maritime margin lift as submarine programs mature. Cash flow is underpinned by submarine milestones, scaling missile and electronics output, and growing aftermarket support revenue.
