Bad news for peace on earth is good news for BAE Systems’ (LSE: BA) shares. That’s a massive tragedy, but unless humanity changes its warlike ways, defence manufacturers like this one will remain in demand. As will other weapons makers such as Babcock International Group (LSE: BAB).
World peace must be in a horrible state right now, because the BAE Systems share price has rocketed 48% over the last year and an astonishing 280% over five years.
FTSE 100 defensives
Babcock, the smaller of the two FTSE 100 stocks, with a £6bn market-cap versus BAE’s £50bn, has put that in the shade. Its shares are up 150% this year, and a staggering 350% over five.
Somewhere on the internet there’s probably an article I wrote for The Motley Fool five or six years ago saying the Babcock share price is ready to rocket. If there is, I’m sad to say I didn’t act on it.
I do own BAE Systems though, so I’m not complaining. The big question as 2025 draws to a close is the one investors ask year round. What happens next?
BAE Systems boasts a large, diversified global order book, and a record £78.3bn backlog providing revenue visibility. Yet it’s run out of steam lately, the shares slipping 12% in three months.
That’s partly down to its demanding valuation, with a price-to-earnings (P/E) ratio around 25, concerns about slightly weaker free cash flow, and talk of peace in Ukraine. It also looks as though the UK won’t be joining the EU’s €150bn defence fund, which could lock BAE out of some future spending.
The UK government appears to be prioritising other commitments over defence. So there are reasons to be cautious. Yet Babcock investors don’t seem worried, with the shares climbing another leg higher in recent weeks.
Babcock isn’t cheap either, with a P/E nudging 25, so this may simply be momentum at work. Or it may reflect the fact that, as the smaller company, it has more room to grow.
Strong growth outlook
The company helped its own cause last month by reporting a strong jump in first-half underlying profits, up 19% to £201m. That was driven by solid revenue growth and a 90 basis point improvement in underlying operating margins to 7.9%. Its contract backlog now stands at £9.9bn.
Both look well placed but what do the experts say? Consensus forecasts for BAE Systems produce a one-year price target of 2,072p, around 20% above today’s level. I’d be more than happy with that.
Interestingly, forecasts for Babcock are more modest, pointing to growth of just 4.6%, lifting the shares to around 1,308p.
Some of these forecasts will have been made before the recent divergence in share price performance, which explains the differential. It might also suggest that BAE Systems has more scope to power on from these levels.
I’m a value investor by nature, so I’m always wary of chasing momentum, and both stocks have plenty of it. Still, with a long-term view, I think they’re well worth considering. The big ‘risk’ is that peace breaks out in 2026. I know it’s Christmas, time of good cheer and all that, but I’m not holding my breath.
