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Major aerospace and defence company Babcock International (LSE: BAB) is already up 15%+ and the year’s only just began!
The rapid surge appears to come from a trifecta of well-timed occurrences — strong half-year results (19% profit growth), a significant upgrade announcement, and geopolitical tensions driving defence spending.
Defence stocks add an ethical element that some investors may disagree with. However, for better or worse, they play a key role in the UK economy. So when discussing markets, they can’t be ignored.
Along with BAE Systems and Rolls-Royce, aerospace and defence are currently driving FTSE 100 growth. The UK’s blue-chip index has already surged to record highs above 10,000 points and doesn’t look to be slowing.
But does this make Babcock a good buy — or has the market already priced in the gains?
Broker analysis
Analyst consensus suggests the majority of growth’s already accounted for. The average 12-month price target is 1,289p — 10% lower than today’s price. Yet five out of seven analysts I researched give the stock a Buy rating, while only two give it a Hold. The situation’s rapidly developing, so we’ll likely see new ratings come in this month as analysts reassess the market.
From what I can tell, the company remains well-positioned for sustainable growth throughout 2026. This is supported by a £9.9bn contract backlog and structural advantages in nuclear, aviation, and marine divisions.
With a forward price-to-earings (P/E) ratio of 25, Babcock looks cheaper than Rolls (at 44) — but still, further growth would be difficult. With such a bloated valuation, there’ll be no mercy if upcoming earnings disappoint.
Any missed estimates or lower forward guidance could shake investor confidence and send the price spiraling downwards.
Outlook for 2026
Babcock’s targeting modest growth this year, between 3%-5% higher than last year. But the real story is about optimising profit from sales. The company has already hit its profit margin target in the Nuclear division and is ramping up its aircraft maintenance work through a French contract worth £60m this year.
Wall Street analysts reckon profits could grow 10%-12% in 2026 but, as we’ve seen, they’re not expecting the share price to shoot much higher.
But its solid contract backlog should keep the company busy well into the 2030s. The crown jewel is an £4bn deal with Indonesia to build and support naval ships over eight years, which should pump out roughly £500m a year once it’s in full swing. There’s also the £1bn Danish frigate programme, potential Swedish orders, and a multi-billion-dollar submarine support contract that’s currently being renegotiated.
On top of this are various submarine-related AUKUS deals and a three-year £114m contract to safely scrap old submarines. In short, the company’s got plenty of work lined up, which is why investors should feel fairly confident about the next few years.
Final thoughts
While it may be difficult for this rally to push higher, Babcock’s pipeline suggests significant long-term growth potential. For investors with a 10-20 year outlook, there’s many reasons to consider the stock.
Personally, I don’t plan to buy right now as I already have my defence quota in BAE. But my interest is piqued. If its 2026 trajectory continues on this path, I may consider rebalancing some funds into the stock.
