BAE Systems (LSE: BA) share price has emerged as one of the clearest beneficiaries of the global shift towards higher defence spending. This pivot is most visible in non-US NATO members’ commitment to more than double their defence budgets.

This is a multi-decade structural transformation to create a long-term deterrent against future aggressors, not a temporary wartime spike.

BAE Systems is Europe’s largest defence contractor, and the world’s sixth‑largest, so it sits at the centre of this transition. This is not about ‘benefitting from war’ — quite the opposite. I see it as part of the process of underwriting peace through deterrence.

So, how high can BAE Systems’ share price go?

Powered by rising earnings growth

Earnings (or ‘profits’) growth is ultimately the driver for all companies’ share prices over the long run. A risk to BAE Systems is any fundamental failure in one of its core products. This could be costly to fix and might damage its reputation.

Nonetheless, the consensus forecast of analysts is that its earnings will rise by a yearly 11.2% average to end-2028. This looks very well supported by strong results and new orders.

Its 2024 full-year numbers saw sales climb 10% year on year to £25.3bn, while underlying earnings before interest and tax (EBIT) climbed 12% to £2.9bn. The order book hit a record £70.5bn.

H1 2025 saw sales jump 11% to £14.6bn, powering EBIT 13% higher to £1.55bn. Order intake surged to £13.2bn, driving a massive £75.4bn order book.

Consequently, management upgraded full-year sales guidance to 8%-10% from 7%-9%. It also upgraded its EBIT guidance to 9%-11% from 8%-10%.

To me, these numbers highlight a business benefitting from higher defence budgets and an order backlog that underwrites future growth.

Indeed, January alone saw BAE Systems win a £453m contract to upgrade radar technology on Typhoon fighter jets. It also received a $473m (£343m) contract to produce self-propelled artillery. And it secured a $184m contract from the US to manufacture amphibious combat vehicles.

How cheap does it look?

BAE Systems’ 2.2 price-to-sales ratio looks a bargain to me at the bottom of its peer group, which averages 5.1. This includes RTX at 3, L3Harris Technologies at 3.1, Rolls-Royce at 5.3, and TransDigm at 9.1

Similarly cheap is the price-to-earnings ratio of 30.3 relative to its competitors’ 34.9 average.

Discounted cash flow analysis highlights where any share should trade, based on cash flow forecasts for the underlying business. Some DCF outcomes are more bullish than mine and some more bearish.

Nevertheless, using an 8.3% discount rate, my DCF analysis suggests BAE Systems is 19% undervalued at its current £19.67 price. This implies a ‘fair value’ for the shares of £24.28.

Knowing this price-to-value gap is critical for long-term profits, as shares can trade towards their fair value over time.

My investment view

Together, the long-term structural defence‑spending backdrop, BAE Systems’ accelerating earnings profile, and its valuation discount create a compelling investment proposition to me.

However, the market still appears to be pricing in a cyclical downturn in the firm’s numbers based on potential shorter-term peace settlements.

I aim to exploit this gap by buying more of the stock very soon. I also think the shares are well worth the attention of other investors.