Given the state of the world, you’d think shares in FTSE 100 weapons maker BAE Systems (LSE: BA) would be firing on all cylinders.
You might think the same about fellow FTSE 100 defence manufacturer Babcock International Group (LSE: BAB), and engineering giant Rolls-Royce (LSE: RR), whose defence division accounts for around a quarter of revenues. For a while, you’d have been right.
All three have been terrific investments over five years. BAE Systems shares are up 236%, Babcock 190% and Rolls-Royce a staggering 900%, although the latter is a much broader business. Lately, excitement has ebbed.
FTSE 100 stocks backfire
BAE Systems peaked at 2,270p on 12 August. It’s since fallen 15%. Babcock is down more than 20% over the same period, with Rolls-Royce sliding 14%. What’s going on?
Before the sell-off, BAE Systems and Babcock traded on price-to-earnings ratios of almost 30, while Rolls-Royce was nudging 50. Even for such well-favoured companies, that’s expensive. Investors might simply have decided not to chase them any higher. Or took some of their ample profits.
With interest rates rising, fears of an AI bubble growing and investors questioning stretched stock market valuations, wariness looks understandable. But have we forgotten their attractions?
BAE Systems reported a record £84bn order backlog at June 2026, while Babcock’s contract backlog stood at £9.8bn in March. Rolls-Royce’s defence division had £17.4bn of orders at the end of 2025, equivalent to more than three years of revenue.
These are extraordinary sums, providing visibility over future revenues that few businesses can match. Governments need military equipment, nuclear submarine propulsion, aircraft engines and support services for years, often decades. Once a supplier is embedded in a complex defence programme, replacing it isn’t easy.
Are they better value today?
Yet huge order books aren’t guarantees of profits. Supply chain problems, labour shortages, cost overruns and delays can erode margins. Babcock’s Type 31 frigate programme demonstrated the danger, with a £140m charge hitting its latest annual results.
There’s also the question of whether governments will deliver on their ambitious defence spending plans. Spending budgets don’t always translate into contracts, while even signed agreements can face delays.
Rolls-Royce brings another risk. Around half its business comes from civil aerospace, leaving it exposed to the variables of airline demand as jet fuel gets ever more expensive.
Check out these forecasts
Yet brokers remain optimistic. The one-year consensus price target for BAE Systems is 2,316p, implying potential growth of 18.6%. Babcock’s 1,299p target suggests gains of more than 36%. Rolls-Royce has a consensus target of 1,780p, almost 34% above today’s price.
Forecasts are hardly guarantees, but those targets suggest recent falls have gone too far. I wouldn’t describe them as bargains though. BAE Systems trades on a P/E ratio of 26.3x and Babcock is at 22.3x. Rolls-Royce’s valuation is a hefty 45.7x.
I hold BAE Systems and Rolls-Royce, but not Babcock. I’ve wanted to complete the hat-trick for ages, and it’s now on my Buy list.
All three are worth considering for long-term investors prepared to pay a premium for quality. After such spectacular runs, a pause was inevitable. Or check out this high-powered FTSE 100 growth stock that we rate. It’s just dipped 25%…
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Harvey Jones owns shares in BAE Systems and Rolls-Royce.
