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BAE Systems‘ (LSE: BA) shares have had a poor run by their standards, falling almost 10% over the last 12 months. Long-term investors won’t be too worried as they’re still up 220% over five years. But they may be wondering what’s going on.
A year or two back I said BAE Systems was the only FTSE 100 stock purchase that could be described as a ‘no- brainer’. In reality, there’s no such thing. It always pays to activate those grey cells when buying shares, even when the company has as good a story to tell as this one.
I was so confident because, in today’s warlike world, there’s a huge market for what BAE sells: tanks, submarines, jet fighters, frigates, drones, and all the rest. I’d much rather we didn’t need to spend money on military kit, but we’re human beings, so we do.
Defence spending boom
BAE has a bumper order backlog of £84bn, giving huge earnings visibility. 2025 sales rose a healthy 10% to £30.7bn and half-year results (30 July) revealed another 9% increase to £15.8bn. So why are its shares heading the other way?
The defence spending boom and enormous order book were priced in yonks ago. BAE’s expensive as a result, with a price-to-earnings (P/E) ratio of 24.3. That’s down from 30x just a few months ago, but hardly bargain territory.
Rolls-Royce has flown
The Rolls-Royce (LSE: RR) share price has surged 925% over five years, although the last year has been much less spectacular, as it nudged up just 20%.
The money’s still rolling in. Underlying operating profit jumped 38% in 2025 to £3.5bn. In the first half of 2026, it rose 46% to £2.5bn. Yet the shares trade on a P/E ratio of roughly 47 and that’s down from 50 a week or two back, but it remains a forbidding valuation. Rolls-Royce will struggle to live up to that. The slightest disappointment could trigger a sell-off.
Two pricey FTSE 100 stocks
A slowing economy could hit civil aviation, while higher jet fuel costs could drive up flight prices and reduce revenues from Rolls-Royce’s maintenance contracts, which are based on hours flown. Then there’s simple gravity. Rolls-Royce has climbed so high, it surely has to reduce elevation at some point.
With BAE, some of the heat has already come out of the share price. So would it make sense to sell the expensive stock and buy the cheaper one? Not for me.
I think Rolls-Royce has earned my long-term devotion. It’s a terrific British success story, firing on all cylinders. So I’ll stick with what I’ve got but won’t buy more. I might add to my stake in BAE Systems if we get a further dip, but I’ll source the money elsewhere rather than banking some of my profits from Rolls-Royce. BAE’s worth considering but it isn’t an outright bargain today. I’d want the P/E to fall further before getting really excited.
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Harvey Jones owns shares in BAE Systems and Rolls-Royce.
This story originally appeared on Motley Fool
