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The BAE Systems (LSE: BA) share price has had a strong 12 months, climbing around 45%, but it’s been outpaced by two other FTSE 100 defence-sector names. Babcock International Group (LSE: BAB) is up an astonishing 160% over the last year, while Rolls-Royce Holdings (LSE: RR) has climbed 105%.
Rolls-Royce is the most complex of the trio, with much of its growth playing out beyond defence, in civil aviation. Yet, all three have benefited from the war in Ukraine and rising geopolitical risk, which has prompted Europe to rearm. As a result they’ve racked up big order books: £75.4bn for BAE and £10.4bn for Babcock. Rolls-Royce’s defence division alone has an order backlog of £18.8bn after taking in another £4bn in the first half of the year.
Babcock shares are no longer cheap
That’s great news for their prospects, if a sombre reflection of the global security picture. Yet, much of those future revenues are now baked into their share prices.
BAE trades on a price-to-earnings ratio (P/E) of about 27, well above the FTSE 100 average of 18. Babcock is playing catch-up with a P/E of around 24. Rolls-Royce has shot to the stars, with a P/E near 56. All three stocks have fallen in the last month, if only by low single digits. So, is the party over? Let’s see what the experts say.
The outlook for BAE looks the most steady. Some 18 analysts have produced a consensus one-year share price target of 2,124p, up about 13.4% from today’s 1,873p.
Naturally, forecasts can’t be relied upon and there’s a huge span of predictions, from 1,540p to 2,500p. But I’d be more than happy if we did get that return.
By contrast, Babcock’s consensus price target is 1,257p, only 3.5% above the current 1,216p. That doesn’t surprise me, given its ballistic run. At some point, gravity was going to make itself felt.
Rolls-Royce has run far enough
Rolls-Royce’s consensus target is 1,224p, up 5.7% from here. That doesn’t surprise me either, given its stellar recent run. I was surprised to see the 14 out of 19 brokers still label Rolls-Royce a Strong Buy, while five say Hold. Although, I can see why investors don’t want to sell today.
I already have all the exposure I need to the defence sector, so won’t buy more. But I think someone starting out might want to consider buying BAE Systems first. It has the biggest order book and credible valuation. Also, it’s been going slower lately. It might also make sense to try buying the stock on a dip.
Babcock has gone too far, too fast to tempt me now. The same goes for Rolls-Royce, while its small module reactors up both the potential risks and rewards.
Naturallly, peace in Ukraine would hurt them all. The war grinds on, but Europe and the US are turning the screw on Vladimir Putin, so who knows what will happen. I’ll leave defence for now and hunt for the next big FTSE 100 winners, rather than pursuing the last ones.
