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FTSE 100 defence manufacturer BAE Systems (LSE: BA) had a cracking 2025, its shares rising 40% over the last 12 months. Rolls-Royce Holdings (LSE: RR), which combines defence with civil aerospace and power systems, did even better, surging 90%.
Both are established UK blue chips, with market values nudging £50bn and £100bn respectively. Yet they were eclipsed by relative minnow Babcock International Group (LSE: BAB), whose shares have rocketed 320% in a single year. It’s now worth £6bn.
That caps a remarkable five-year run for the sector. BAE Systems is up 238%, Rolls-Royce has soared 837%, and Babcock has climbed 320%. The reason is clear enough. Western governments have belatedly woken up to the need to rearm, as threats from Russia and China intensify.
FTSE 100 defence heroes
All three boast chunky order books that continue to grow, offering strong earnings visibility years ahead. Demand is clearly there. But that alone doesn’t make them simple investments.
Much of the expected growth now looks priced in. BAE Systems and Babcock trade on a price-to-earnings ratio just under 25, while Rolls-Royce sits on a far higher P/E of 54. These companies don’t simply need to hit sales and profits targets. They need to beat them, and keep doing so.
Even defence groups remain vulnerable to mishaps. Technical faults, supply chain disruption, delays to contracts, and slower order wins can all inflict damage. Their strategic importance doesn’t eliminate old-fashioned business risk. Valuation still matters.
That helps explain why all three shares have drifted back recently. Over the last three months, Rolls-Royce is down 3%, Babcock has slipped 8%, and BAE Systems has fallen 14%.
Wider market nerves have played a part. Investors have grown twitchy about the artificial intelligence bubble, and that caution has spilled into other sectors.
There’s also a political issue. Talks over UK access to the EU’s defence fund have stalled amid rows over the entry fee. British defence firms would benefit materially if a deal is struck. If negotiations revive, sentiment could lift quickly.
Rolls-Royce has broader opportunities – and threats. Its push into small modular nuclear reactors, or mini-nukes, opens major global possibilities. Yet progress is heavily dependent on government decisions and procurement timetables.
Short-term stock forecasts
Of the three, BAE Systems looks best placed to me right now. It’s had a quieter 2025, and the recent price decline gives it a springboard for growth. Babcock has travelled a long way very fast, and gravity may start to reassert itself. Rolls-Royce, for all its recent brilliance, has to justify a very pricey valuation.
Broker forecasts broadly echo this view. Consensus points to a 12-month target of 2,047p for BAE Systems, around 21% above current levels. Rolls-Royce is pencilled in for 1,260p, a rise of 14%. Babcock’s median target of 1,308p is up less than 5% from today, suggesting limited scope for further gains.
Forecasts are never guaranteed. If 2026 brings an unlikely peace in Ukraine, that could rattle the sector. I can’t see it, though. For investors seeking exposure, these shares are worth considering. They may not shoot the lights out in the short term, but chould still go great guns over time.
