Recent troubling developments in the Middle East have propelled BAE Systems and Babcock shares to new heights. Harvey Jones explores the potential for further gains from this point onward.
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Middle East Impact on Stocks
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This morning (2 March), BAE Systems (LSE: BA) surged over 5% once again, while Babcock (LSE: BAB) shares experienced a slight increase as well. These two defence stocks in the FTSE 100 have already been propelled by rising geopolitical tensions. With the situation in Iran intensifying, they are receiving yet another boost. Is there anything that can halt their momentum?
Recently, there have been no obstacles in their path. Both FTSE 100 companies surged following Russia’s invasion of Ukraine in 2022 and have continued to rise since then. The BAE Systems share price has increased by 52% over the past year and 336% over the last five years, not including dividends. Meanwhile, Babcock International Group has shown even more remarkable growth, with its shares rising by 104% in one year and 420% over five years.
Potential Gains Ahead
FTSE 100 aggressive industry
Europe is enhancing its military capabilities in response to Vladimir Putin, and now we must also consider Iran as a concern. If China decides to act on Taiwan, we could soon face a trifecta of issues. This situation does not even factor in the unpredictable responses from the White House. It’s a disheartening commentary on human nature.
While the various threats do render UK defence stocks an attractive option, investors should proceed with caution. The traditional investment principles remain relevant, so it’s important to avoid pursuing previous performance and paying too much for an asset.
Investing Insights from Analysts
Both BAE Systems and Babcock are considered costly according to traditional standards, with their price-to-earnings ratios nearing 27. This is significantly higher than the current FTSE 100 average, which hovers around 18.
To provide additional context for those figures, the average P/E ratio for BAE Systems over the past decade has been approximately 18 times earnings. In contrast, Babcock’s P/E has dropped to as low as 3.5 during this period. This decline was significantly influenced by a period of sharply decreasing earnings during the pandemic.
Increasing earnings and backlog of orders
Market Reactions to Geopolitical Events
BAE Systems reported its full-year results in February, revealing a 12% increase in underlying operating profit to £3.32 billion for 2025, surpassing expectations. The company’s order backlog reached an unprecedented £83.6 billion, while net debt decreased by 22% to £3.84 billion. Babcock’s most recent complete results were published on 21 November, showing a 19% rise in underlying operating profit to £201 million, with its contract backlog reaching £9.9 billion.
Recently, investors have started to show caution. The stock prices of both BAE Systems and Babcock have actually dipped compared to a week ago, as investors believe they may have reached their peak for the time being. Some may have decided to cash in their gains.
Currently, the situation with Iran is factored into the prices, so it may require a different catalyst to push them even higher. This could manifest as the UK revealing a significant increase in defense spending or securing additional major contracts. Conversely, if a peace agreement is reached, both stocks might decline swiftly. At least until another threat arises.
It’s fascinating to observe BAE Systems gaining momentum significantly quicker than Babcock today, though it’s not entirely unexpected. BAE is the larger, more comprehensive defense option, often favored by investors during challenging times. Additionally, Babcock has shown strong performance recently, leading investors to believe that BAE will demonstrate its greater strength.
Investors looking to gain exposure to the defense industry should consider both BAE Systems and Babcock with a long-term perspective. While no stock experiences perpetual growth, unfortunately, the current geopolitical climate is decidedly advantageous for BAE Systems and Babcock.