BAE Systems Naviges Rising Defense Spending with Steady Guidance

Oliver BlakeWednesday, May 7, 2025 9:15 pm ET
19min read

As geopolitical tensions fuel global defense budgets, BAE Systems has reaffirmed its financial trajectory for 2025, with robust order intake and strategic positioning set to benefit from a tailwind of government spending. The UK-based defense giant’s first-quarter performance has put it on track to deliver 7–9% revenue growth this year, even as it navigates macroeconomic headwinds. Let’s dissect the numbers and opportunities.

Financial Fortitude Amid Global Uncertainty

BAE’s management emphasized a “strong start” to 2025, with trading aligned to expectations and full-year guidance unchanged. The financial highlights are clear:
- Revenue Growth: £28.34bn in 2024 could expand to £30.5–£31.0bn in 2025.
- Underlying EBIT: Expected to rise 8–10% to £3.27–£3.32bn, driven by higher volume and cost discipline.
- Order Intake: A record $2.7bn in Q1 2025, including critical contracts like the $356m U.S. armored vehicles deal and the $799m U.S. Air Force Integration Support Services (ISC) agreement.

The company’s order backlog now stands at £26bn, with 95% of U.S. production shielded from tariffs due to domestic manufacturing—a strategic advantage as trade tensions simmer.

Defense Dollars Flowing: Regional Breakdown

BAE’s geographic diversification is a key strength in this era of fragmented defense spending:

  1. Europe/NATO: With European NATO members racing to meet the 2% GDP defense spending target, BAE’s combat aircraft (e.g., Typhoon upgrades), missile systems, and electronic warfare solutions are in high demand. The Archer howitzer program alone has secured over $300m in orders this quarter, targeting export markets like Finland and Sweden.

  2. UK: The government’s pledge to hit 2.5% GDP defense spending by 2027 is a lifeline for BAE. The company is deeply embedded in the UK’s Strategic Defence Review, with stakes in the River-class destroyer program (a £1.5bn+ contract) and nuclear submarine upgrades.

  3. U.S.: The March 2025 Continuing Resolution averted a government shutdown, ensuring steady funding for BAE’s programs like the Amphibious Combat Vehicle (ACV-30mm) and missile defense systems. The U.S. market accounts for 35% of BAE’s revenue, a stable pillar.

  4. Asia-Pacific/Middle East: BAE is capitalizing on regional arms races, with contracts for artillery systems, cybersecurity, and munitions. The $600m MBDA missile deal underscores its export prowess.

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Strategic Leverage: Workforce and Capacity

To meet demand, BAE is expanding its workforce—particularly in the UK’s North West (submarine yards) and South West (aerospace)—while investing in automation and supply chain resilience. The company’s £1.5bn share buyback program (with £392m completed to date) signals confidence in its balance sheet, even as it retains flexibility for R&D and acquisitions.

Analyst Take and Risks

Analysts like Russ Mould (AJ Bell) highlight BAE’s “resilience” amid global challenges, but caution that the stock may already price in much of the good news. Key risks include:
- Contract Delays: Defense programs often face bureaucratic hurdles.
- Geopolitical Volatility: Overreliance on U.S. and UK budgets could backfire if spending slows.

Conclusion: A Steady Hand in a Turbulent Sector

BAE Systems’ 2025 outlook is underpinned by $2.7bn in Q1 orders, £3bn+ in annual EBIT growth, and a fortress-like order book. With global defense spending projected to rise by ~3.5% annually through 2027 (per the Stockholm International Peace Research Institute), BAE’s diversified portfolio and geographic spread position it as a prime beneficiary.

The July 30 half-year results will be pivotal, as management will update on contract conversions and margin trends. Investors should also watch for earnings upgrades—a 10% EBIT growth would lift 2025 EPS to ~74p, a 10% jump from 2024’s 68.5p.

With a dividend yield of 4.2% (after the final 2024 dividend of 20.6p) and buybacks returning cash to shareholders, BAE’s valuation—currently trading at 9.5x 2025E EBIT—appears reasonable for a company in a secular growth industry.

In a world where defense spending is a geopolitical constant, BAE’s steady guidance and execution make it a compelling play for investors with a long-term horizon.