BAE Systems (LSE:BA.) shares are up 47% over the past 12 months. The last three years have been incredibly strong, but that’s hardly surprising when we consider that there’s a war in Europe and western powers have largely increased defence spending.
The company falls into the industrials sector, and it’s the second-largest listed company in this segment in the UK. The largest is Rolls-Royce. But these are by no means the only companies here.
So, how does BAE compare and which stocks look the most attractive going into 2026? Let’s explore.
What the data tells us
Here’s a list of the important data comparing BAE with some of its UK-listed peers.
| Company | P/E (Fwd Year 1) | P/E (Fwd Year 2) | PEG | Net debt (£) | Dividend yield | Operating margin |
|---|---|---|---|---|---|---|
| BAE | 22.9 | 20.4 | 1.9 | £7bn | 2.1% | 9.9% |
| Rolls | 40.9 | 35.5 | 2.7 | –£1.1bn | 0.8% | 18% |
| Bodycote | 16.1 | 14.4 | 1.4 | £170m | 3.3% | 6.7% |
| Melrose | 18.4 | 14.9 | 0.8 | £1.7bn | 1.3% | 14.5% |
| Babcock | 22.6 | 20.4 | 2 | £364m | 0.7% | 8.4% |
| Chemring | 22.7 | 18.3 | n.a. | £89.1m | 1.81% | 14.8% |
This list is by no means exhaustive, but it’s always good to compare. We could also used this data to rank these companies, assigning scores for each metric. That’s how a lot of screeners work.
Personally, I think Melrose Industries stands out, primarily due to its price-to-earnings-to-growth (PEG) ratio. The PEG ratio is calculated by dividing the forward price-to-earnings (P/E) ratio by the expected earnings growth rate over the medium term.
The concept was popularised by legendary investor Peter Lynch, who argued that a company’s valuation should be judged in the context of its growth prospects. By adjusting the P/E ratio for expected earnings growth, the PEG aims to highlight shares that may be mispriced relative to their underlying growth potential.
Historically, a figure under one has suggested good value. But in reality, it needs to made relative to the sector and take into account net debt/cash and dividends for a better idea of balance sheet health and total returns.
So, broadly, what else do I take from the data? Well, Babcock and Chemring don’t interest me much. The numbers are fine but don’t excel.
Rolls-Royce clearly looks the most expensive, but operationally it’s on a high. Operating margins are getting stronger and the company keeps on exciting shareholders.
BAE looks quite middling to me. Like Babcock and Chemring, I’m not seeing a huge amount to get excited about.
For me, Bodycote also stands out for the right reasons. The PEG ratio combined with the dividend yield points to an undervaluation. Operating margins could improve, however.
Could Melrose and Bodycote outperform BAE in 2026?
Looking at this data, I believe there’s some cause to believe the Melrose and Bodycote share prices could outperform BAE in 2026. Operationally, I also think Bodycote has some interesting exposure to data centres and even space exploration — two mega themes going forward.
However, there’s plenty to keep an eye on. Melrose and Bodycote have manageable debts, but these are worth watching as we move forward. Both companies could also be negatively impacted by increasing UK energy prices. These are already high and it’s incredible that successive governments have failed to address this.
Personally, I think both Melrose and Bodycote are worth considering as we move into 2026.
