2025’s been a strong year for defence stocks, driven by resurgent weapons spending in Europe. BAE Systems (LSE:BA.), by some distance the continent’s largest defence contractor, has risen a whopping 48% in value.
Those mighty gains pale in comparison with those of Babcock International (LSE:BAB) and Rolls-Royce (LSE:RR.) though. These FTSE 100 heavyweight shares have risen 87% and 82% since 1 January.
Can these UK shares keep climbing? Let’s take a look at City forecasts.
Babcock International
Let’s begin with Babcock, whose stunning ascent saw it claim a place in the FTSE 100 in March. It has extensive expertise, from training pilots to building weapons systems and logistics vehicles. It also manages the UK’s nuclear submarine fleet and provides other seaborne support at Devonport, the largest naval base in Western Europe.
Organic revenues rose 11% in the 12 months to September, and its contract backlog grew to £10.4bn. As a would-be investor, I’m especially drawn to its outperforming Nuclear division — Panmure Liberum analysts believe it will deliver 50% of group profits by 2030 on the back of strong growth.
Be mindful however, that cost overruns and project delays have also plagued Babcock in recent times.
Today, the average 12-month share price forecast on the company is £12.03. That’s roughly 28% higher than current levels.
Rolls-Royce
Diversified engineer Rolls-Royce is another critical supplier to Britain’s armed forces. Its services include supplying the engines and nuclear propulsion systems that power aircraft and submarines, respectively.
Defence revenues growth has been reliable rather than spectacular of late — revenues rose just 1% in January-June. But it’s confident of growing sales by 14-16% over the medium term as the market increases in size.
Rolls has other things in its favour that could drive its share price, like further gains from its transformation programme and long-term growth in civil aerospace. But there are risks here, like a potential air travel slowdown. This could reduce its engines’ flying hours, and therefore demand for its aftermarket services. This is why I’m not considering buying.
The average 12-month price forecast on Rolls shares is £11.58. That’s up around 8% from today.
BAE Systems
BAE sells to a lot of countries, including the UK, US, Saudi Arabia, India and Australia. And its expertise is far and wide, spanning land, sea, air, and even cyberspace. It therefore has an array of substantial opportunities to grow profits — and it’s making excellent progress in capturing them.
Indeed, the company last month upgraded its 2025 guidance as customer demand continued to swell. Sales were up 11% in the six months to June. With a strong balance sheet, BAE has scope to accelerate sales through strategic investments and acquisitions as well.
The average 12-month price forecast for BAE Systems shares is £21.16, up 24% from current levels. Potential investors need to factor in the risk of US military spending cuts to earnings. But on balance, I think this is a top defence stock to consider.
