BAE Systems still has room to climbing as defence priorities shift

Deutsche Bank upgraded BAE Systems to a 'buy' rating with a price target of 2,170p, citing the UK's Strategic Defence and Security Review (SDSR) which favors BAE's key areas. The SDSR includes expansion of the UK's nuclear submarine fleet to 12, benefiting BAE as the lead contractor, and increased focus on cyber defense. While the UK's increased procurement of F-35 jets poses a risk to the Eurofighter Typhoon program, Deutsche Bank anticipates stronger sales forecasts between 2028 and 2030 and a general re-rating of European defense stocks will drive further growth.

Analysis

Deutsche Bank has reiterated a 'buy' rating on BAE Systems PLC (LSE:BA.) and increased its price target from 1,900p to 2,170p, primarily driven by the positive implications of the UK's 2025 Strategic Defence and Security Review (SDSR). The SDSR signals a strategic pivot, notably in land and naval capabilities, with a plan to expand the UK's nuclear-powered submarine fleet to 12 units. This development is highly favorable for BAE, the lead contractor for these projects, providing significant long-term revenue visibility. Furthermore, the SDSR's emphasis on technologies relevant to lessons from Ukraine, such as unmanned ground and aerial systems, alongside increased government focus on cyber defence and counterintelligence, positions BAE to capitalize on these growth areas. However, the outlook is not without caveats; the UK's decision to procure more F-35 jets could potentially divert resources from BAE-involved programmes like the Eurofighter Typhoon and the next-generation GCAP fighter. Despite this, Deutsche Bank anticipates stronger sales forecasts for BAE between 2028 and 2030, coupled with a general re-rating of European defence stocks, underpinning the upgraded valuation. BAE's stock has already appreciated approximately 70% year-to-date, though it experienced a minor decline of 1.2% to 1,957.5p in late morning trading on June 6, 2025, suggesting that the market may not have fully priced in its growth trajectory.

Key Decisions for Investors

• Investors may consider the reaffirmed 'buy' rating and increased price target from Deutsche Bank as a positive signal, suggesting further upside potential to 2,170p despite the stock's significant year-to-date appreciation.
• The long-term revenue visibility from expanded submarine contracts provides a strong foundation for BAE's growth, warranting attention as a key value driver.
• It is prudent to monitor any shifts in UK air domain spending, particularly concerning the F-35 procurement's impact on the Eurofighter Typhoon and GCAP programmes, as this represents a potential risk to specific growth segments.
• The broader re-rating of European defence stocks, driven by shifting geopolitical priorities, could provide an additional tailwind for BAE Systems.