BAE Systems (LSE: BA) jumped another 5%+ this morning (2 March), with Babcock (LSE: BAB) shares rising slightly too. These two FTSE 100 defence stocks have already been turbocharged by geopolitical tensions. As the conflict in Iran escalates, they’ve got another lift. Can anything stop them?
Lately, nothing has stood in their way. Both FTSE 100 stocks took off after Russia invaded Ukraine in 2022 and have only climbed since. The BAE Systems share price is up 52% over the last 12 months, and 336% over five, with dividends on top. Babcock International Group’s performance is even more eye-watering. Its shares are up 104% over one year and 420% over five.
FTSE 100 offensive sector
Europe is rearming to counter Vladimir Putin, and now we have Iran to worry about. If China moves on Taiwan, we could soon have the hat-trick. That’s not taking into account the unpredictable reactions in the White House. It’s a sad reflection on humanity.
These multiple threats do make UK defence stocks a compelling proposition, but investors must tread carefully. The old investment rules still apply, so be wary of chasing past performance, and overpaying for an asset.
BAE Systems and Babcock are both expensive by conventional metrics, their price-to-earnings ratios are now pushing 27. That’s comfortably above today’s FTSE 100 average of around 18.
To give those numbers more context, the average BAE Systems P/E over the last 10 years has been around 18 times earnings. In the last decade, Babcock’s P/E has fallen as low as 3.5. However, this was skewed by a spell of plunging earnings around the pandemic.
Rising profits and order backlogs
BAE Systems’ full-year results in February showed underlying operating profit up 12% to £3.32bn in 2025, beating forecasts. Its order backlog hit a record £83.6bn, while net debt fell 22% to £3.84bn. Babcock’s last full set landed on 21 November. Underlying operating profit was up 19% to £201m, while its contract backlog hit £9.9bn.
Yet lately, investors have begun to appear wary. Shares in both BAE Systems and Babcock are actually lower than they were a week ago, as investors suspected they’d flown as high as they could for now. Some will have taken profits.
Today, conflict with Iran is priced in, so it could take something else to drive them even higher. That could come in the shape of the UK announcing a big defence spending boost, or still more big contract wins. On the other hand, if we get some kind of peace deal, both shares could retreat in short order. At least until the next threat emerges.
It’s interesting to see BAE Systems rising much faster than Babcock today, but not hugely surprising. It’s the bigger, broader defence play, the go-to stock for investors in times of trouble. Also, Babcock has outperformed lately, and investors may feel BAE will flex its superior muscle power.
For investors seeking exposure to the defence sector, both stocks merit consideration with a long-term view. No share climbs forever, but sadly, the winds of war are firmly in BAE Systems’ and Babcock’s favour today.
