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Looking for the best FTSE 100 shares to put in a Stocks and Shares ISA or Lifetime ISA? At 738p per share, I think Babcock International (LSE:BAB) may be one of the blue-chip index’s greatest bargains.
The defence giant’s rise almost 47% in value since the start of 2025. And I think it can continue rising over the long term. Here’s why.
In good shape
Defence stocks have soared in value since early 2022. Following Russia’s invasion of Ukraine, Western rearmament has hit levels not seen since the end of the Cold War.
There’s a good chance this sector boom will continue as the geopolitical landscape becomes more uncertain. But this is by no means guaranteed. While arms spending across the NATO bloc is tipped to keep rising strongly, uncertainty remains over the level of US defence expenditure going forwards
This is one reason why Babcock is one of my preferred picks today. With less than 5% of turnover sourced from Washington, it’s less exposed to the risk of falling Stateside arms budgets. Instead, it relies on the UK, Australia, South Africa, and Canada to drive revenues (these nations accounted for 90% of total sales last year).
My main concern relates to rising costs. These are a constant threat across the defence industry, and has been a particular thorn for Babcock in recent times. It’s so far booked charges of £190m to build five Type 31 frigates for the Royal Navy.
Yet the prospect of further rapid sales growth (organic revenues leapt 11% in the first half) still makes the business worth serious consideration, in my book. And especially given the exceptional value of its shares right now.
Great value
Today Babcock is one of the cheapest defence stocks on the market. With a forward price-to-earnings (P/E) ratio of 16.2 times, it’s much cheaper than many of the industry’s other big beasts like BAE Systems (23.2), Leonardo (26.5), Thales (34.2), and Rheinmetall (52.5).
This isn’t the only thing that’s caught my eye. Predictions of sharp earnings growth (48%) this fiscal period leaves a price-to-earnings-to-growth (PEG) ratio of 0.3.
Any reading below 1 suggests that a share is undervalued relative to predicted profits.
Strength through diversification
Like those other large defence firms I’ve described, Babcock’s expertise is spread far and wide, allowing it to weather weakness in particular sub-sectors. Its operations include building ships and servicing submarines for the Royal Navy; training army personnel to drive tanks; and operating military satellite communications systems.
This diversification provides investors with added protection, and makes it an important supplier to the world’s armed forces.
Last month it sealed a £1bn, five-year contract extension with the Ministry of Defence to “deliver a comprehensive range of support capabilities for the Army in the UK with global reach“. I’m expecting contracts to keep pouring in at home and abroad as countries prepare for growing geopolitical challenges.
