It’s been a sticky few weeks for Babcock International Group (LSE: BAB), BAE Systems (LSE: BA.) and Rolls-Royce (LSE: RR) shares. All three FTSE 100 defence stocks have fallen by double digits over the last bumpy month, as my table shows. What’s gone wrong?
| 1 month | 1 year | 5 years | |
| Babcock | -21.4% | 15.3% | 236.8% |
| BAE Systems | -15.7% | 7.1% | 265.9% |
| Roll-Royce | -11.4% | 42.2% | 1,026.6% |
I’d love to inform you all that world peace has just broken out. Sadly, that’s not the case at all. The war in Iran drags on, with no conclusion in sight. China has sent Donald Trump a stark warning over Taiwan. Casualties mount in Ukraine.
Are recent dips a buying opportunity?
The West needs to rearm, the only argument is where we find the money. Today, all three boast huge order books. Babcock’s is around £10bn, BAE Systems is roughly £84bn, while the figure for Rolls-Royce’s Defence arm is £7.3bn. These numbers give them multi-year earnings visibility, backed by government spending, which is much less cyclical than the consumer version.
On the other hand, orders don’t guarantee profits. They’ve still got to deliver the kit, while keeping costs in check, managing supply chains, and solving the inevitable technical issues that arise.
Babcock’s latest market update (13 May) showed full-year revenue rising 10% to £5.3bn, with underlying operating profit up an impressive 19% to £433m. But there was a larger-than-expected £140m charge on its Type 31 frigate programme.
On 7 May, BAE Systems predicted an increase in underlying operating profits between 9% and 11% in 2026, from 2025’s £30.7bn. But free cash flow is forecast to dip from last year’s £2.2bn to £1.3bn.
Rolls-Royce’s defence division only makes up 25% of the groups overall revenues, so the engineering group can’t be directly compared to Babcock and BAE. All three divisions are going great guns but investors surely feel that Rolls could struggle to maintain its stunning performance.
Are these FTSE 100 stocks still expensive?
I think the main reason for the recent dip is that their shares became too pricey, after such a strong run. Just a few months ago, Babcock and BAE Systems were trading at price-to-earnings ratios of around 30, while the Rolls-Royce P/E was heading towards a dizzying 65. So what do their trailing P/Es look like today?
- Babcock – 19.6
- BAE – 25.3
- Rolls-Royce – 39.4
While they’re notably cheaper than they were, it’s hard to call any of the shares a screaming bargain buy. However, I still think there’s a buying opportunity here for investors who want to increase their long-term exposure to the defence sector. In my view, all three have earned their place in a balanced portfolio of FTSE 100 shares.
Since I already have solid positions in BAE Systems and Rolls-Royce, I won’t buy more. But I’m seriously tempted by Babcock. This is a share I’ll be keeping a close eye on. I think it has the potential to outperform the stock market and deliver even higher returns in the longer return.
Should you invest £5,000 in Rolls-Royce Plc right now?
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Harvey Jones owns shares in BAE Systems plc and Rolls-Royce Holdings plc.
