- Company name
- BAE Systems
- Sector
- Aerospace & defense
- About
- BAE Systems is a UK defense company and one of the largest defense contractors in the world. It builds combat aircraft parts and systems, warships and submarines, armored vehicles, artillery and ammunition, electronic warfare systems, and cyber and intelligence services. Its largest customers are the governments of the US, the UK, Saudi Arabia, and Australia. In the US, it works mostly through BAE Systems, Inc., which makes electronics such as the F-15EX warning system and vehicles such as the Amphibious Combat Vehicle. It makes money from long-term government contracts, which often give advance payments and steady cash flow. In the first half of 2026, sales were £15.8 billion, and its order backlog reached a record £84.0 billion at June 30, 2026. The American Depositary Receipt (BAESY) trades in the US and represents ordinary shares listed in London.
- Thesis
- The market prices BAE Systems at a discount because it doubts that government defense budgets will grow as fast and as long as the backlog suggests. The shares fell about 20% from their March 2026 high, while the business kept growing. In the UK, the budget on October 28, 2026 fully funded the Defence Investment Plan, including a £4.7 billion gap, and set 2030 as the target date for defense spending of 3% of GDP. But the government will say how it pays for the 3% only at the Spending Review in 2027. Talk of peace in Ukraine has also made defense stocks fall before. For the gap to close, three things must be true. BAE must meet its raised 2026 guidance: sales growth of 8% to 10%, underlying EBIT growth of 10% to 12%, and free cash flow above £2.0 billion. Order intake must keep the backlog near its record of £84.0 billion. The 2027 Spending Review must fund the path to 3% of GDP, and US and European budgets must keep orders for munitions, ships, and electronics high. The next checks are the full-year 2026 results, expected in February 2027, with the 2027 guidance, and the UK Spending Review in 2027. If budgets hold, the gap can close over the next four to six quarters. If governments delay spending, the discount can last longer.
- Risks
- BAE Systems depends on government budgets. A delay in the UK path to 3% of GDP, which the government will fund only at the 2027 Spending Review, or a change in US budget priorities can slow new orders.
Peace talks in Ukraine or a lower threat level in Europe and the Middle East can lower the price that investors pay for defense stocks, even if contracts stay in place.
Large programs, such as submarines and warships, are complex and long. Cost overruns or delays on fixed-price work can reduce profit.
Sales to Saudi Arabia and other export customers depend on government export licenses and politics. A change in UK or US export policy can stop deliveries.
BAE reports in pounds, but a large part of its profit is in US dollars. A weaker dollar lowers its reported sales and profit, and the ADR price also moves with the exchange rate.
- Balance sheet
- Cash: £4.2B
Debt: £7.4B
Net debt: £3.2B
Interest cover: 6.8×
Debt due within 12 months: £701M
Ratings: Fitch A- (stable outlook), Moody's A3
BAE Systems funds itself mostly with bonds and with advance payments from government customers. At June 30, 2026, loans and overdrafts were £7.4 billion, of which £0.7 billion was current, and cash was £4.2 billion. Net debt excluding leases, as the company states it, was £3.2 billion, down from £3.8 billion at December 31, 2025, because customer advances raised free cash flow to £1.8 billion in the first half. Debt excludes £1.8 billion of lease liabilities. Interest cover is IFRS operating profit divided by net finance costs for the first half of 2026. The pension plans were in an accounting surplus at June 30, 2026. The company's policy is to keep an investment-grade rating. The Fitch rating is from its May 13, 2026 action, and the Moody's rating is from the FY 2025 results.
As of Jun 30, 2026.
- Checkpoints
- Oct 28, 2026: UK budget: defense funding. Passed. Watch: A budget that fills the £4.7 billion Defence Investment Plan gap or sets a path to 3% of GDP passes; a budget that leaves the gap open fails. Outcome: The budget fully funded the Defence Investment Plan, including the £4.7 billion gap, and set 2030 as the target date for 3% of GDP.
Feb 18, 2027 (estimate): FY 2026 results and 2027 guidance. Pending. Watch: 2026 sales growth of 8% to 10%, free cash flow above £2.0 billion, and 2027 guidance for more growth pass; results below guidance or flat 2027 guidance fail.
2027 (estimate): UK Spending Review: path to 3% of GDP. Pending. Watch: A Spending Review that funds defense spending of 3% of GDP by 2030 passes; a Spending Review that delays the funding or the 2030 date fails.
- Recent events
- Oct 28, 2026: The UK budget fully funded the £15 billion Defence Investment Plan, including £4.7 billion that had no funding before. Other departments give up part of their capital budgets to pay for it. The government set 2030 as the target date for defense spending of 3% of GDP, but it will say how it pays for this only at the Spending Review in 2027. The National Wealth Fund and the British Business Bank will also put up to £5 billion over 4 years into defense and related sectors.
Oct 19, 2026: BAE Systems and the US Department of War signed a seven-year framework agreement to make up to 25,000 APKWS laser-guidance kits a year. Production capacity can grow to 35,000 kits a year if allies order more. The agreement is not a purchase order. Congress must approve and fund the purchases, and the two sides did not give a value.
Oct 6, 2026: The Times reported that the UK government may delay its decision on how to raise defense spending to 3% of GDP, possibly to a Spending Review in October 2027. The Treasury said that the date of the Spending Review is not set and called the report "pure rumour and speculation".
Oct 2, 2026: The US Department of War announced, on September 30 and October 2, six contract actions for BAE Systems worth about $656 million. The largest was $230 million for 32 Amphibious Combat Vehicle recovery variants, and another was $147 million for F-15EX electronic warfare hardware.
Jul 30, 2026: BAE Systems reported H1 2026 results. Sales were £15.8 billion, up 9%, and underlying EBIT was £1.7 billion, up 11%. Underlying EPS was 38.9p, up 13%. Order intake was £16.4 billion, and the backlog reached a record £84.0 billion. It raised its 2026 guidance for sales, EBIT, and EPS, and raised its free cash flow guidance to more than £2.0 billion. It declared an interim dividend of 15.0p, payable on December 2, 2026.
Jul 30, 2026: BAE Systems said that it signed a seven-year framework agreement with the US Department of War to expand production of THAAD missile seekers.
May 13, 2026: Fitch affirmed the A- long-term rating of BAE Systems with a stable outlook.