BAE Systems (LSE:BA.) shares have appreciated 16.3% since the start of 2025, driven by talk of rapid Western rearmament. This takes total gains since Russia’s invasion of Ukraine in early 2022 to a whopping 123%.
I’m wondering though, if the FTSE 100 defence giant still looks cheap based on predicted earnings growth.
The GARP (Growth at a Reasonable Price) strategy seeks to find companies that offer the holy grail of growth and value. It aims to help investors achieve capital appreciation without overpaying for the privilege. So does BAE Systems’ share price look cheap despite its recent meaty gains?
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PEG ratio
To ascertain a stock’s GARP credentials, I need to divide the forward price-to-earnings (P/E) ratio by expected profits. This gives me the price-to-earnings growth (PEG) multiple. To qualify as a value share, BAE Systems needs to have a reading of 1 or below. Here’s how it scores:
| 2025 | 2026 | |
|---|---|---|
| Earnings per share (EPS) growth | 9% | 10% |
| P/E ratio | 18.2 | 16.5 |
| PEG ratio | 2 | 1.7 |
You’ll see that the defence firm falls short from a GARP perspective. Despite predictions of solid earnings growth, an historically high P/E reading drives the PEG ratio up.
Sector comparison
While disappointing, it’s worth remembering that earnings multiples have leapt across the defence sector more recently. So I also want to see how BAE Systems’ shares stack up compared with other industry giants.
Here’s what I’ve discovered, based on expected earnings per share for the following US, UK and European contactors’ current financial years:
| Company | P/E ratio | PEG ratio |
|---|---|---|
| Lockheed Martin | 16.2 | 0.7 |
| RTX | 20.5 | 0.3 |
| Northrop Grumman | 16.1 | -10.1 |
| Safran | 32.1 | -0.1 |
| Babcock International | 14.3 | 0.3 |
| Chemring | 19 | 0.8 |
| Rolls-Royce | 33.8 | 1 |
When it comes to the P/E ratio, BAE sits in the middle of the pack. But again, when it comes to considering it as a GARP investment, the Footsie company disappoints. Aside from Northrop and Safran, where predictions of falling earnings result in a negative PEG multiple, each of BAE’s peers sits in perfect GARP territory of 1 or below.
The verdict
While BAE Systems may not be the hottest GARP stock out there, it doesn’t necessarily make it a poor investment, in my book. In fact, there are several reasons why it’s one of my defence sector favourites. With 44% of its sales generated from the US, it’s less vulnerable to arms-related cuts under the Trump administration that many others.
Around 40%’s generated from other NATO members (most notably the UK) and the bloc’s ‘Enhanced Partner’, Australia. The remainder of sales come from fast-growing emerging markets in Asia and the Middle East.
I also like BAE Systems because of its broad range of capabilities. These range from building submarines and cybersecurity products, through to manufacturing electronics for spacecraft and rifle ammunition.
This gives the FTSE 100 company a range of opportunities to grow earnings. It also helps protect group profits from changing mission requirements that could affect sales in specific product areas.
In the current climate, I think BAE Systems shares are worth a very close look from investors.
