BAE Systems (BA.L)

Business Overview

BAE Systems is the European prime in the peer set: large US subsidiary, GBP reporting. FY2025 sales were £30.7B against £83.6B Group order backlog at 31 December 2025 (IFRS order book £63.1B, a different measure), with book-to-bill at 1.2x on order intake of £36.8B divided by sales. The business is >90% defence-oriented by mix, though BAE does not publish a formal defence/commercial revenue split. Market capitalisation was roughly £58.5B (~$78.3B at GBP/USD 1.3387 on 10 June 2026; 3,001.0M voting shares × £19.50).

Air sector sales were £9.3B, 30% of group sales. Return on sales (ROS), underlying EBIT divided by sales, varies widely by sector: Electronic Systems leads at 15.4% and Maritime trails at 6.7%, with Air (11.9%), Platforms & Services (11.4%) and Cyber & Intelligence (9.3%) in between. Group ROS was 10.8%.

The demand-cycle guide uses BAE as the NATO European rearmament read-through: all 32 NATO Allies met the 2% GDP defence spending target for the first time in 2025, with the Hague Summit targeting 5% of GDP by 2035. BAE captures European and UK budget tails that US-domiciled filers access only through FMS (foreign military sales) or subsidiary revenue.

How the Numbers Read

FY2025 group free cash flow, on BAE's own alternative performance measure (APM) basis outside GAAP and IFRS, was £2,158M: 92% of underlying profit of £2,342M, and just above the 90% level this site treats as strong conversion. Against IFRS profit of £2,151M, free cash flow converts at 100%. The backlog guide includes BAE's 1.2x alongside US filers; order intake divided by sales is BAE's stated definition, distinct from GD's orders ÷ revenue or NOC's net awards ÷ sales.

For USD cross-peer screens, state the FX rate and date. At GBP/USD 1.3387 on 10 June 2026, market cap converts to ~$78.3B. The FCF yield guide flags that BAE's GBP reporting requires restating cap and FCF at a common FX before any cross-peer comparison; mixing FX dates across peers distorts a screen that otherwise looks precise.

BAE's £83.6B Group order backlog is not directly comparable to LMT $193.6B or RTX $268B without checking definitions. GD splits funded and unfunded; BAE publishes both Group order backlog and a lower IFRS order book (£63.1B).

Valuation Framework

BAE offers European budget exposure that no US-domiciled prime in the set carries. FX translation and pension accounting under UK GAAP/IFRS add noise whenever BAE's cash or earnings figures sit beside a US filer's.

At 30% of group sales, Air is BAE's closest analogue to filed programme concentration elsewhere: F-35 is 27% of LMT consolidated sales and GD submarines 24%, both programme-level filings. BAE discloses sector mix only; it does not break out a single-platform share the way LMT and GD do.

What to Watch in the Financials

Group order backlog vs IFRS order book. £83.6B Group order backlog vs £63.1B IFRS order book. Use one measure consistently when tracking quarter-on-quarter momentum.

Book-to-bill. 1.2x in FY2025, above the 1.05 level this site treats as growth territory. European rearmament order intake should show here before it flows to US peer backlogs via FMS.

Air sector mix. 30% of group sales (£9.3B), driven by Typhoon, F-35 subcontract work and combat air programmes.

GBP/USD for cross-peer screens. Restate market cap and FCF at the build-date FX (1.3387 on 10 June 2026); mixing FX dates across peers distorts the comparison.

Maritime margin. ROS of 6.7% is the portfolio floor, comparable to GD Marine's 7.0% segment operating margin.

Key Risks

FX translation on cross-peer valuation. GBP reporting means USD screens move with sterling even when operational performance is unchanged.

Backlog definition complexity. Group order backlog (£83.6B) exceeds IFRS order book (£63.1B) by £20.5B. Comparing BAE to US 10-K backlog totals without adjustment will mis-rank forward visibility.

European budget execution. NATO 2% compliance in 2025 guarantees nothing about 5% by 2035. BAE's order intake depends on UK and European sovereign funding following through.

Maritime and Cyber margins. Maritime 6.7% and Cyber & Intelligence 9.3% ROS drag the 10.8% group average. Shipbuilding and services contracts carry execution risk similar to US yard peers.