We have some exciting news to share! The Motley Fool UK has now become The Twelfth Magpie -- an independent, UK-owned company, led by our long-serving UK management team — Mark Rogers, Chris Nials and Heather Adlington. In practical terms, it’s the same team you know, now fully focused on serving our UK readers and members.

Just as importantly, our approach remains unchanged: long-term, jargon-free, and on your side. This site is our new home, and there will be extra tweaks made across the coming few days as we settle in. So if anything looks a little off, please bear with us!

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Are BAE Systems shares the best UK industrials investment going into 2026?

Dr James Fox takes a closer look at BAE Systems shares and the alternatives following an impressive 2025 and as we move into a new year.

| More on:

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Twelfth Magpie’s Premium Investing Services. Become a member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more, and get a free 'Best Buy Now' stock!.

BAE Systems (LSE:BA.) shares are up 47% over the past 12 months. The last three years have been incredibly strong, but that’s hardly surprising when we consider that there’s a war in Europe and western powers have largely increased defence spending.

               

Should you buy BAE Systems shares today?

Before you decide, please take a moment to review this report first. Despite ongoing uncertainties from US tariffs to global conflicts, Mark Rogers and his team believe many UK shares still trade at substantial discounts, offering savvy investors plenty of potential opportunities to learn about.

That’s why this could be an ideal time to secure this valuable research – Mark’s analysts have scoured the markets to reveal 5 of his favourite long-term ‘Buys’. Please, don’t make any big decisions before seeing them.

The company falls into the industrials sector, and it’s the second-largest listed company in this segment in the UK. The largest is Rolls-Royce. But these are by no means the only companies here.

So, how does BAE compare and which stocks look the most attractive going into 2026? Let’s explore.

What the data tells us

Here’s a list of the important data comparing BAE with some of its UK-listed peers.

CompanyP/E (Fwd Year 1)P/E (Fwd Year 2)PEGNet debt (£)Dividend yieldOperating margin
BAE22.920.41.9£7bn2.1%9.9%
Rolls40.935.52.7–£1.1bn0.8%18%
Bodycote16.114.41.4£170m3.3%6.7%
Melrose18.414.90.8£1.7bn1.3%14.5%
Babcock22.620.42£364m0.7%8.4%
Chemring22.718.3n.a.£89.1m1.81%14.8%

This list is by no means exhaustive, but it’s always good to compare. We could also used this data to rank these companies, assigning scores for each metric. That’s how a lot of screeners work.

Personally, I think Melrose Industries stands out, primarily due to its price-to-earnings-to-growth (PEG) ratio. The PEG ratio is calculated by dividing the forward price-to-earnings (P/E) ratio by the expected earnings growth rate over the medium term.

The concept was popularised by legendary investor Peter Lynch, who argued that a company’s valuation should be judged in the context of its growth prospects. By adjusting the P/E ratio for expected earnings growth, the PEG aims to highlight shares that may be mispriced relative to their underlying growth potential.

Historically, a figure under one has suggested good value. But in reality, it needs to made relative to the sector and take into account net debt/cash and dividends for a better idea of balance sheet health and total returns.

So, broadly, what else do I take from the data? Well, Babcock and Chemring don’t interest me much. The numbers are fine but don’t excel.

Rolls-Royce clearly looks the most expensive, but operationally it’s on a high. Operating margins are getting stronger and the company keeps on exciting shareholders.

BAE looks quite middling to me. Like Babcock and Chemring, I’m not seeing a huge amount to get excited about.

For me, Bodycote also stands out for the right reasons. The PEG ratio combined with the dividend yield points to an undervaluation. Operating margins could improve, however.

Could Melrose and Bodycote outperform BAE in 2026?

Looking at this data, I believe there’s some cause to believe the Melrose and Bodycote share prices could outperform BAE in 2026. Operationally, I also think Bodycote has some interesting exposure to data centres and even space exploration — two mega themes going forward.

However, there’s plenty to keep an eye on. Melrose and Bodycote have manageable debts, but these are worth watching as we move forward. Both companies could also be negatively impacted by increasing UK energy prices. These are already high and it’s incredible that successive governments have failed to address this.

Personally, I think both Melrose and Bodycote are worth considering as we move into 2026.

James Fox has positions in Melrose Industries Plc and Rolls-Royce. The Motley Fool UK has recommended BAE Systems, Bodycote Plc, Chemring Group Plc, Melrose Industries Plc, and Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

DIVIDEND YIELD text written on a notebook with chart
Investing Articles

I’m targeting a yearly income of £6,898 from £20,000 in this FTSE heavyweight!

This FTSE dividend play looks far too cheap for the cash it throws off — and the mix of rising…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How much would I need to invest in this FTSE 100 dividend gem to aim for £14,754 a year in passive income?

Passive income is the goal for many investors, and this FTSE dividend star highlights the qualities that can turn long‑term…

Read more »

View over Old Man Of Storr, Isle Of Skye, Scotland
Investing Articles

How much do you need in a SIPP to earn a £667 monthly passive income?

Harvey Jones shows how investors could use the generous tax breaks available on a Self-Invested Personal Pension, or SIPP, to…

Read more »

Happy male couple looking at a laptop screen together
Investing Articles

Up 50% with a stunning 6.4% yield! How do Aviva shares do it?

Harvey Jones is hugely impressed by the recent performance of Aviva shares, and examines why the FTSE 100 insurer has…

Read more »

Satellite on planet background
Investing Articles

Down 19% to under £20! Is now exactly the right time for me to capitalise on BAE Systems’ bargain-basement share price?

BAE Systems’ share price has dropped sharply, but a far bigger long term demand cycle is only just beginning. Here’s…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Closing in on £33 and around an all‑time high, is this FTSE 250 favourite seriously mispriced?

With the shares pushing into record territory, I’ve revisited the underlying business, its growth outlook and the valuation picture investors…

Read more »

Close-up of British bank notes
Investing Articles

£20,000 invested in Barclays shares a year ago is now worth…

Barclays shares have quietly delivered a 41% return in just 12 months — and the long term numbers suggest the…

Read more »

Young black woman walking in Central London for shopping
Investing Articles

£9,000 in an ISA? Here’s how to target a £675 passive income with 7% investment trusts

Investment trusts can offer a huge and stable passive income every year. Royston Wild reveals three to consider -- including…

Read more »