BAE Systems’ (LSE: BA.) share price has jumped about 77% since the start of 2025, taking it to a little over £20 per share. That’s a huge move for a FTSE 100 defence contractor.

It’s comfortably beaten Melrose Industries and is slightly lagging Rolls-Royce.

So is it fair for new investors to ask whether they’ve missed the boat, and for existing holders to wonder if it’s time to bank profits?

What has driven the surge?

Sadly, global conflicts drag on, despite attempts at peace deals. As a result, global military spending reached a record $2.7trn in 2024, up roughly 9% in real terms from the year before.

Naturally, there’s been particularly sharp increases in Europe and the Middle East. Conflicts in these two regions have kept defence and energy security at the top of political agendas. That, in turn, has ramped up demand for kit and services from contractors in the sector.

BAE’s own numbers have also impressed. In 2025:

• Revenue reached £28.3bn, up 8% year on year.
• Operating profit hit £2.9bn.
• Basic earnings per share (EPS) climbed to 68.8p. 

These were all ahead of the prior year.

Meanwhile, order intake reached around £36.8bn and the order backlog climbed to a record £83.6bn. This gives the group unusually strong visibility over future earnings.

Valuation: clearly expensive

After such a run, BAE does not look cheap. Just looking at a few quick valuation metrics, we can see the shares trade on the following:

• A price-to-earnings (P/E) ratio around 31.
• A price-to-book (P/B) multiple above 5.
• An enterprise value to EBIT of roughly 27.

Those are all well above typical long-run defence sector averages.

Before Russia’s invasion of Ukraine, BAE’s forward P/E was closer to 12 times earnings, so the market has more than doubled the rating it’s willing to pay for the stock.

Plus, with a yield of only 1.7%, dividends add minimal income potential. So the majority of returns from here will need to come from capital gains rather than income.

What are the risks?

There are several risks to keep in mind. Most critically, BAE’s dependance on government defence budgets. As global conflicts evolve, political shifts or budgetary reallocations could slow order growth.

The shares may have also seen uncharacteristically high growth due to rising tensions in Eastern Europe and the Middle East. Historically, such periods are often followed by a short-term correction as tensions ease.

Closer to home, BAE is dealing with industrial relations issues, including strikes in parts of its UK workforce. This could negatively impact the success of recent acquisitions like Ball Aerospace.

The bottom line

For new investors, the current valuation leaves little room for disappointment. Any setback on contracts, budgets or geopolitics could hit the shares hard in the short term.

Realistically, growth in the upcoming 12 months is unlikely to match the spectacular gains seen since 2025.

For existing shareholders or patient investors, it’s still worth considering the shares. The combination of a record order book, government spending and a growing dividend keep the long-term thesis intact.

But for those seeking outsized growth, I’ve spotted more appealing value plays on the FTSE 100 lately.