The BAE Systems share price falls despite an upgrade in the defence group’s profit forecast!

Given the movement in the BAE Systems (LSE:BA.) share price this morning (30 July) — after the defence contractor reported its results for the first six months of 2025 — the group’s directors could be forgiven for wondering what they have to do to satisfy investors.

Not only were the key numbers better than analysts had predicted but the company also upgraded its guidance for the full year. Previously, it was expecting an 8%-10% year-on-year improvement in EBIT (earnings before interest and tax) for 2025. Now, it’s forecasting a 9%-11% increase.

Despite this, the shares were trading 2.5% lower by late morning.

Measure (6 months ended 30 June 2025)	Forecast	Actual	Difference
Sales (£m)	14,505	14,621	+116
Underlying EBIT (£m)	1,524	1,550	+26
Underlying earnings per share (£m)	34.1	34.7	+0.6
Free cash flow (£m)	(376)	(368)	+8

^{Source: company reports}

Why?

Of course, you don’t need to be a mathematician to know that the announcement doesn’t necessarily mean that this year’s results are going to be better than previously expected. An increase of 9%-10% is still on the cards.

And these are only forecasts.

However, I suspect the downbeat response of investors is explained by the fact that, in some respects, the group’s been a victim of its own success. In August 2023, it announced plans to repurchase £1.5bn of its own shares by July 2027. Since then, the group’s share price has risen over 75%.

This means its buyback programme is going to see fewer shares being bought than originally anticipated. As a result, it hasn’t upgraded its earnings per share forecast.

Anything else?

Another issue that could be concerning investors is a drop in the group’s order book. Compared to six months earlier, it was down £2.4bn at 30 June. However, at £75.4bn, it still represents over 2.5 years of sales.

In my opinion, given the strong growth prospects for the industry as a whole, I don’t think this is anything to be concerned about.

NATO members have pledged to increase core defence spending to 3.5% of Gross Domestic Product — with a further 1.5% on “resilience and security” — by 2035.

Not for everyone

However, I acknowledge that investing in the sector can be controversial. Making money from selling weapons is unlikely to appeal to ‘ethical’ funds, which means the pool of potential investors is going to be smaller.

But I believe a government should protect its people. Even in a more peaceful world, countries would still need weapons to defend themselves.

My view

However, anyone investing now is, in my opinion, unlikely to enjoy the same level of share price growth as that seen recently.

Since July 2020, the stock’s risen over 250%. As a result, I don’t think its shares can be described as cheap. The stock currently trades on 23.8 times expected earnings for 2026. Looking further ahead, this falls to 21.5 (2026) and 19.5 (2027).

And there are many more attractive income opportunities elsewhere. The yield is well below the FTSE 100 average.

But whether we like it or not, the defence industry is clearly growing. And I don’t see anything in this morning’s announcement to suggest that the company isn’t going to benefit from this. Therefore, those comfortable investing in the sector, could consider taking a position in BAE Systems.

The post The BAE Systems share price falls despite an upgrade in the defence group’s profit forecast! appeared first on The Motley Fool UK.

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James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended BAE Systems. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.