BAE Systems (LSE: BA.) shares have fallen sharply over the past month. Currently trading at 1,911.5p as I write on 9 September, the defence giant’s share price sits nearly 15% below where it stood just four weeks ago, and considerably below the 52-week high of 2,360p.

Here’s why I’ll be buying shares in the company for the first time next week.

What’s changed?

BAE Systems has had a strong run in the last five years, with a 244% share price gain fuelled by rising defence budgets following Russia’s invasion of Ukraine. But the picture has become more mixed lately, for a few specific reasons.

First, government bond yields have been climbing, and long-term UK borrowing costs recently hit a multi-decade high. That matters for a company like BAE, since higher yields raise the cost of the debt-servicing that governments rely on to fund large, multi-year defence contracts.

Second, analyst opinion has been genuinely split. Morgan Stanley recently named the company its top pick in European defence, though it trimmed its price target to 2,420p from 2,662p while maintaining an Overweight rating.

Meanwhile, Erste Group downgraded the shares to Hold from Buy owing to slower earnings growth relative to peers, despite strong NATO demand.

Third, the broader European defence sector has cooled after a sharp run-up earlier in the year, with investors booking profits across the sector rather than reacting to anything specific to the company.

Why I’m buying now

Put together, the backdrop has genuinely shifted since the shares were closer to their highs. That said, there’s still plenty that I like about the business:

• A record order backlog of around £84bn provides years of revenue visibility.
• H1 2026 results showed sales up 9% and earnings per share up 13%, with guidance raised for the full year.
• Free cash flow reached £1.8bn in the first half alone.
• NATO members continue to commit to higher defence spending over the coming decade.

Across the business, our outstanding teams have delivered another strong period of operational and financial performance, which gives us the confidence to upgrade our full year guidance.

CEO Charles Woodburn

On valuation, the price-to-earnings (P/E) ratio is sitting at 27.4 as I write. It’s still a premium rating for an industrial business, though meaningfully lower than many defence stocks.

A modest dividend yield of 2% is noteworthy, but it’s the growth story that I’ll be chasing with my purchase next week.

None of this removes the risks. A prolonged period of rising bond yields would keep pressure on the sector broadly, and any pause or reversal in European defence spending commitments would directly affect the order pipeline that underpins the company’s growth story.

My verdict

In my view, the recent fall reflects a genuine shift in sentiment rather than any deterioration in the underlying business, which continues to deliver strong growth and a record order book.

I’ve been waiting to add defence stocks to my list, and I think this is a strong company that I can buy at a reasonable valuation with major growth prospects.

Nothing is without risk, and I do think investors should consider other FTSE 100 opportunities that are hiding in plain sight…

Should you invest £5,000 in BAE Systems right now?

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Ken Hall does not hold any positions in the companies mentioned.