BAE Systems: Thesis Remains Sound Despite The H1-26 Surge

BAE Systems remains a high-quality defense contractor but trades at an excessive 26-29x P/E, well above historical norms. Despite strong H1-26 results, rising backlog, and 8-12% operating profit growth guidance, FCF and OCF are declining while CapEx and intangibles rise. Cash conversion is weakening; earnings quality is questioned as EPS grows but FCF drops 17% and OCF falls 9% since 2023. I raise my PT to £16/share ($86 ADR) but maintain a "Hold" rating due to valuation and cash flow risks, awaiting multiple normalizations.