BAE Systems PLC shares rocketed over 5% to 2,158p, just below last month's all-time high, as the defence contractor reported final results at the top end of its previous guidance.
Revenues of £30.7 billion came in at the upper end of guidance, underlying earning were above both market estimates and the guided growth of 9-11%, while free cash flow decreased 14% to £2.16 billion given increased investment, but over a three year period came in at more than £7 billion, higher than the previously estimated £6 billion.
UBS said orders were 25% ahead of expectations, largely driven by the Air division due to the Turkey Eurofighter order recognition.
Profit guidance for 2026 was largely in line with expectations, the Swiss bank's analysts said, while cumulative free cash flow guidance of at least £6 billion for 2026-28 "may be a source of some discussion" against a consensus of £7.6 billion. "However, this is likely linked to 2026 FCF guidance also behind expectations at >£1.3 billion versus consensus £2.1 billion likely due to payments made to suppliers linked to Eurofighter Turkey, in our view."
As analyst Richard Hunter at Interactive Investor puts it: "BAE is basking in the increasing heat of geopolitical tensions with a set of results which have comfortably blown past estimates."
He reminds that the group upped its guidance at the halfway stage, reiterated the numbers at its third quarter update and has now delivered for the full year – "and then some".
This, he recognised, reflects "the unfortunate sign of the times that defence stocks are squarely back in fashion, as governments around the world look to protect their interests and lands from growing tensions. For shareholders, however, this has resulted in significant rewards."
The "prodigious" cash flow enabled net debt to be reduced by 22% to £3.84 billion, while the 10% dividend rise took the projected yield to 1.8% which Hunter says may be "pedestrian" but maintained a payment which has been increased for more than 20 consecutive years.
Headwinds may be few and far between, he added, with the lack of a share buyback announcement potentially resulting in some "minor disappointment even though the rationale is sound as the group diverts resources elsewhere for investment and debt reduction purposes".
Market analyst Mark Crouch at eToro says: “BAE Systems doesn’t manufacture optimism, it manufactures deterrence. And right now, deterrence is in high demand.
"A 12% rise in operating profit tells you governments aren’t hesitating in reaching for their chequebooks. BAE's order book now stands at a record £83.6 billion, stretching years into the horizon, and it’s why BAE shares have definitively outpaced the FTSE 100.
"With free cash flow set to top £6 billion through 2026, that trajectory looks set to continue."
He conceded that there’s "a bittersweet truth" to investing in defence, as the Russia-Ukraine War grinds on and tensions in the Middle East remain at boiling point.