I like BAE shares, but they aren’t cheap! Here are 2 potentially-better-value alternatives

BAE (LSE:BA.) shares have had a remarkable run. Up over 300% since 2022 and sitting near all-time highs, the British defence giant has been one of the largest beneficiaries of the global rearmament wave.

With revenue hitting Â£28.3bn and rising to Â£33bn in 2026, the momentum’s still there operationally. It has a near-unrivalled position across submarines, combat aircraft, electronic warfare and cyber security. It’s a genuinely exceptional business.

The snag, as ever, is the price. BAE now trades on 24 times forward earnings. The analyst consensus target sits just 10% above the current price. This doesn’t make BAE a bad investment â but it does mean investors are paying a full price for a well-known story.

Long-term defence contracts are a really strong place to be. However, there’s definitely some risk attached to the valuation.

Under-the-radar alternative

This next one’s a very different kind of company. It’s small, American, and almost entirely off the radar for UK investors. Innovative Aerosystems (NASDAQ:ISSC) makes advanced avionic systems for commercial, business, and military aircraft. This includes the F-16 digital flight control computer and a new customisable cockpit platform called the Liberty Flight Deck.

Formerly called Innovative Solutions and Support, there’s a lot going for it. The operating margin of 29.4% is market leading and the balance sheet is rock solid. However, it’s trading at 26.7 times forward earnings.

But here’s the real thesis: management’s set a long-term target of $250m in revenue with EBITDA margins of 25%-30%. Current revenue is around $90m.

If they get anywhere close to that, the stock looks extraordinarily cheap by those future standards. Only three brokers cover it, which is arguably the point: analysts haven’t caught up yet.

That doesn’t mean there isn’t risk though. A pull-forward of F-16 revenue from 2026 into 2025 means near-term numbers may look soft. It’s also a small company and very volatile.

Nonetheless, if it can hit those targets, we’re looking at a stock that’s trading around 7-8 times forward earnings (it’s just a few years away).

Often overlooked

Most investors won’t have heard of Innovative Aerosystems, but they will know Airbus. It’s a quality company and one half of the only viable global duopoly in commercial aviation. Boeing‘s well-documented troubles have contributed to give Airbus a backlog that stretches years into the future and pricing power it hasn’t enjoyed in decades.

What’s interesting is that despite this structural advantage, the stock’s been derated meaningfully. On 2027 numbers, it trades on 18 times earnings, falling to under 15 times by 2028. The balance sheet also carries net cash of over â¬12bn. The 2.1% dividend yield is also worth watching.

The main risk is operational rather than strategic. Airbus has struggled persistently to ramp up production rates to match its order book, with supply chain bottlenecks a stubborn constraint.

Nonetheless, like ISSC, it’s well worth considering from a valuation perspective. I also like BAE, but the richer valuation suggests investors should think carefully about the entry price.

The post I like BAE shares, but they aren’t cheap! Here are 2 potentially-better-value alternatives appeared first on The Motley Fool UK.

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James Fox has positions in Airbus and Innovative Aerosystems. 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.