What happens with BAE Systems (LSE: BA.) Shares? The company just announced its full-year earnings for 2025 and I think it’s fair to say it’s been a good year. The backlog of orders has increased further. Profits increased by 12%. Sales increase 10%. This came on the back of confirmed contracts with the RAF and US Navy as well. All the good news led to an impressive 10% increase in profits.

How did all of this affect the stock price? It fell by 2%, knocking £1bn or so off the company’s market value. Crikey.

Escalating threats

The reason for this discrepancy is likely simple: good results are priced in. The common stock market saying applies here: buy the rumour, sell the news. The general idea is that stock prices often rise on high expectations and some investors sell to make some profits.

I think a better strategy for potential investors is to zoom out and look at the big picture. Is this an undervalued buy today? Can BAE Systems continue the momentum that has seen its share price rise 341% in the past five years? Is this stock likely to deliver above-average returns for years to come?

Before I answer those questions, let me say that a phrase from the annual reports caught my attention. It was “Increasing threat environment”. This euphemism seems particularly relevant because it comes just days before two new conflicts erupt in the Middle East and Asia.

The reality of investing in a defense company is that increased threats mean more demands. It’s no surprise that BAE Systems has had a record backlog of orders in the past few years. Many investors may want to stay away here for ethical reasons.

At the same time, it is difficult not to see that this situation is now the norm. The era of “peace dividends” in which we all hoped that war would slowly become a thing of the past seems like a distant dream given recent events. It seems impossible to put this toothpaste back into the tube.

More spending

The result of all this is that military spending is rising. NATO members have allocated billions to develop their tools and this is the main reason for the increasing backlog of orders at BAE Systems. It’s a trend that may still be in its early stages.

Some estimates suggest that Britain will double its defense spending by the 2030s. Mr. Trump has spoken of the need for an additional half a trillion dollars in the coming years. By the way, the United Kingdom and the United States are two of BAE Systems’ largest customers.

There are no guarantees of course. If tensions subside (as I’m sure we all hope they will) in the coming years, governments will be relieved not to have to make difficult budget decisions like the above. Overall, I think BAE Systems stock is worth a look today.