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BAE Systems (LSE: BA) jumped another 5%+ this morning (2 March), with Babcock (LSE: BAB) shares rose slightly too. These two FTSE 100 Defense stocks have already been charged by the country’s conflicts. As the conflict in Iran escalates, they get another lift. Is there anything to stop them?
Lately, nothing has stopped them. Both FTSE 100 stocks started after Russia invaded Ukraine in 2022 and have risen since then. BAE Systems’ share price is up 52% in the past 12 months, and 336% over the five, with gains on top. Babcock International Group’s performance is even more exciting. Its shares are up 104% in one year and 420% over five.
The attacking sector of the FTSE 100
Europe is gearing up again to fight Vladimir Putin, and now we have Iran to worry about. If China advances in Taiwan, we could soon have a hat-trick. That doesn’t account for the unexpected reaction in the White House. It is a sad portrait of humanity.
These multiple threats make UK defense stocks a compelling proposition, but investors should tread carefully. The old rules of investing still apply, so beware of chasing past performance, and overpaying for assets.
BAE Systems and Babcock are both expensive by conventional metrics, with their price-to-earnings ratios now exceeding 27. That’s just above today’s FTSE 100 average of about 18.
To give those numbers more context, BAE Systems’ P/E ratio over the past 10 years has been around 18 times earnings. Over the past decade, Babcock’s P/E has fallen to 3.5. However, this has been overshadowed by the influx of large amounts of money in the pandemic.
Growing profits and order backlogs
BAE Systems’ full-year results in February showed underlying operating profit rose 12% to £3.32bn by 2025, beating forecasts. Its order backlog hit a record £83.6bn, while total debt fell 22% to £3.84bn. Babcock’s last full set was on November 21. Underlying operating profit rose 19% to £201m, while its back-end contract work hit £9.9bn.
Recently, however, investors have begun to appear cautious. Shares in both BAE Systems and Babcock are actually lower than they were last week, as investors suspected they would fly as high as possible for now. Others will then take advantage.
Today, conflict with Iran has a price, so it would take something else to drive them even higher. That could be in the case of the UK announcing a major increase in defense spending, even if it still wins huge contracts. On the other hand, if we get some kind of peace agreement, both parties can quickly retreat. At least until the next threat appears.
It’s interesting to see BAE Systems rising faster than Babcock today, but not too surprising. It’s a big, broad, defensive play for stock investors in times of crisis. Also, Babcock has performed very well recently, and investors may feel BAE is about to flex its upward muscle.
For investors seeking exposure to the defense sector, both stocks are worth considering from a long-term perspective. No share goes up forever, but sadly, the winds of war are strong at BAE Systems and in Babcock’s favor today.
