BAE Systems (LSE: BA) continues strengthening its global defence footprint, even though the share price still feels surprisingly restrained.

The company benefits from long‑cycle programmes, rising international demand, and a deep order backlog supporting multi-year revenue visibility. Its broad exposure across air, land, sea, cyber, and electronic systems gives it resilience few industrial peers can match.

With geopolitical tensions driving sustained investment in modern defence capabilities, is now the time to buy more of the stock?

Recent results highlight key earnings drivers

Over the long run, earnings (profits) growth powers any company’s share price higher. A risk to BAE is any failure in one of its key products that would be costly to fix and might damage its reputation.

However, its 2025 results, released on 18 February, showed sales rise 10% year on year to £30.7bn. Underlying earnings before interest and taxes (EBIT) jumped 12% to £3.3bn. Sales margins edged up from 10.6% to 10.8%, and underlying earnings per share (EPS) increased 12% to 75.2p.

Free cash flow remained robust at £2.16bn, despite higher R&D investment. Order intake of £36.8bn pushed the backlog to a record £83.6bn, reflecting broad-based demand across air, maritime, electronic systems and US platforms.

Management guidance is for an increase in 2026 of 7%-9% in sales and 9%-11% in EBIT. Underlying EPS is expected to also jump by 9%-11%, with free cash flow projected at over £1.3bn.

Management expects a consistently high build-up of free cash flow going forward, with more than £6bn accumulated by 2028. This can be a major driver for growth in itself.

Short-term pricing vs long-term business

NATO members have pledged to lift combined defence budgets to 5% of gross domestic product by 2035, up from 2% last year. This equates to $423bn (£314bn) in additional annual spending across non-US NATO members alone.

This marks a long-term structural shift toward boosting deterrence to deter aggression, rather than a temporary fix to short-term conflicts. As such, while some might see buying defence stocks as ‘profiting from war’, I disagree and see it as part of the process of underwriting peace through deterrence.

BAE is positioned at the centre of this shift, as Europe’s largest defence contractor and the world’s sixth‑largest. Its 2025 results underline this, with its key role in the £10bn Dreadnought submarine build for the Royal Navy.

It also benefits from core involvement in the Typhoon fighter, recently winning a £4.6bn contract to support Turkey’s recent purchase. And it secured a $1.2bn contract to provide the US Space Force with space-based missile tracking capabilities.

Crucially, defence contracts are rarely cancelled and typically span many years, if not decades. They provide unusually dependable revenue, cash flow, and operational continuity.

Do the shares still look undervalued?

BAE’s 2.3 price-to-sales ratio is bottom of its competitor group, which averages 5. These firms comprise L3Harris Technologies at 3, RTX at 3.1, Rolls-Royce at 5.7, and TransDigm at 8.2.

So BAE looks very undervalued on this measure. The same is true of its 31.7 price-to-earnings ratio compared to its peers’ average of 35.5. And its 5.8 price-to-book ratio also looks a bargain against the 17.8 average of its competitors.

Given this, I will be adding to my holding in the firm soon. I also think the stock is well worth the attention of other investors.