BAE Systems' strategic acquisitions and innovation

BAE Systems progressed in 2024 with strong operational momentum, driven by international security needs and key program wins in aerospace, maritime, and electronic systems. Strategic acquisitions and a record order backlog support its focus on innovation and efficiency, positioning the company to deliver critical defense and security capabilities while continuing to outperform analysts' expectations.

BAE Systems plc is a British multinational company specializing in defense, aerospace, and security solutions. Headquartered in London, it designs, develops, and supports advanced products across air, land, sea, space, and cyber domains. The company’s offerings include military aircraft, naval ships, submarines, combat vehicles, electronic systems, and cyber protection. Serving government and defense customers worldwide, BAE Systems works closely with international partners, contributing to both national security and technological innovation.

The company’s operations span five segments:Air (30%),Electronic Systems (25%),Maritime (22%),Platforms and Services (15%), andCyber Intelligence (8%). Key geographic revenue sources include the US (47.7%), the UK (26.8%), Saudi Arabia (11%), Europe (6.6%), Asia/Pacific (1.3%), Qatar (1%),Canada (0.7%), and other regions (0.5%).

FY 24 performance exceeds guidance

BAE Systems released its FY 24 results, with revenue up 13.9% y/y, reaching £26.3bn, driven by strong program performance across all sectors, strong and growing demand due to risks and security concerns across the globe and the benefit of M&A activities in the years, including the acquisition of Ball Aerospace (now Space & Mission Systems (SMS). EBITDA rose by 15.3% to £3.3bn, with a margin of 12.4%. Net profit increased by 5.4% to £2bn. Notably, the company exceeded analysts' revenue expectations for the eighth consecutive quarter.

Strong backlog and pipeline

BAE Systems reported a robust FY 24, securing £33.7bn in new orders, which contributed to a combined pipeline and backlog valued at 9x the company’s FY 24 sales. Theorder backlog rose 11% to reach a record £77.8bn, continuing its upward momentum with a three-year CAGR of 32.4%.

This strategic focus enabled BAE Systems to deliver critical capabilities and maintain consistent operational performance. In 2024, significant milestones included securing a joint venture agreement with Leonardo SpA and JAIEC for theGlobal Combat Air Program (GCAP), targeting next-generation combat aircraft development.

Under the AUKUS initiative, BAE Systems, alongside ASC Pty Ltd, began work on Australia’s new fleet of nuclear-powered submarines, entering a mobilization arrangement and initiating construction of Hunter Class frigates in Adelaide. Furthermore, continued demand for combat vehicles led to additional contracts worth around £2bn for the Hägglunds business unit. BAE also achieved successes in space, supporting US Space Force and NASA launches and delivering a key scientific instrument for NASA’s Nancy Grace Roman Space Telescope.

Positive fundamental trajectory

BAE Systems posted a decent revenue CAGR of 10.5% over FY 21-24, reaching £26.3bn. EBITDA outpaced revenue growth, reflecting a CAGR of 13.5% over the same period, reaching £3.3bn in FY 24, with margins expanding from 11.4% to 12.4%. As a result, net income rose at a CAGR of 3.6% to £1.9bn in FY 24.

FCF increased from £1.6bn to £2.4bn over the same period. Cash and cash equivalent rose from £2.9bn in FY 21 to £3.4bn in FY 24. Moreover, debt to equity of the company increased from 85% to 87.6%.

In comparison, Rolls-Royce Holding Plc, a local peer, posted a revenue CAGR of 19% over the past three years, reaching £18.9bn in FY 24. EBITDA rose at a CAGR of 41.9%, reaching £2.9bn in FY 24. Net income rose at a CAGR of 175.9% to £2.5bn.

Impressive valuation metrics

Over the past 12 months, the company's stock has delivered robust returns of approximately 44.7%, reflecting a positive fundamental trajectory. However, in comparison, Rolls-Royce Holding’s stock has delivered higher returns of 115.4%.

BAE Systems is currently trading at a P/E of 26.2x, based on FY 25 estimated EPS of £0.7, which is higher than its 3-year historical average of 17.8x but significantly lower than Rolls-Royce Holding’s P/E of 41.3x. Likewise, the company is currently trading at an EV/EBITDA multiple of 14.6x, based on the FY 25 estimated EBITDA of £4,267m, which is higher than its 3-year historical average of 9.7x but lower than that of Rolls-Royce Holding (21.8x).

BAE Systems is monitored and generally liked by 16 analysts: eight have ‘Buy’ ratings, three have ‘Outperform’ ratings and five have ‘Hold’ ratings for an average target price of £19.7, implying just 4.7% upside potential from its current price. Analysts’ views are further supported by an anticipated revenue CAGR of 7.2% over FY 24-27, reaching £34.9bn. EBITDA CAGR of 6% to £4.9bn, with a margin of 14.1% in FY 27. In addition, analysts estimate a net profit CAGR of 9.8%, reaching £2.6bn, with EPS expected to increase to £0.9 in FY 27, from £0.6 in FY 24. Likewise, analysts estimate EBITDA CAGR of 11.1% and net profit CAGR of 1.6% for BAE Systems.

Overall, the company strengthened its global position and innovation pipeline in 2024 through strategic acquisitions, notably Ball Aerospace, expanding its presence in critical space and defense sectors. Driven by heightened security demands, the company reported record operational momentum and robust order backlog. However, it faces key risks including uncertainties in long-term contract profitability, due to reliance on cost and risk estimates, global supply chain disruptions and energy price volatility, and climate-related impacts on asset valuations and operations.