Defence stocks’ stonking returns since 2022 have been a standout for European equity investors, but concerns are mounting about the sustainability of government funding pledges and lofty valuations. In the wake of the UK’s eventual release of its Defence Investment Plan (DIP), it seems an appropriate moment to confirm exactly who our top London-listed industry picks are.
Given names like Babcock International (BAB), Cohort (CHRT) and QinetiQ (QQ) generate roughly 40 to 70 per cent of their revenues from the UK government, the lengthy delay in the release of the DIP weighed on investor sentiment as dysfunction around British defence and security planning was highlighted. Continental names have also been feeling the pain of late from an uncertain moment for European defence, from Germany’s defence champion Rheinmetall (DE:RHM) to Czech ammunition producer Czechoslovak Group (NL:CSG).
However, the direction of travel for many UK-listed defence players is still a positive one. Two shares we think are particularly well placed at the moment are Babcock and Chemring (CHG).
Babcock shares are down more than 18 per cent this year, and sold off just before the DIP was announced when the government said it would mainly refurbish Type 83 destroyers rather than building new ones. However, there was plenty in the DIP that suggests opportunities for the company, from naval base rebuilds to nuclear submarine commitments.
The company, which generates most revenue from nuclear-related work and is focused on support and maintenance, disclosed an almost £10bn order backlog in results last month. It announced another £200mn buyback, and is making positive noises on M&A. The shares are trading almost 40 per cent below the mean analyst target price, per FactSet.
Another winner from the DIP is National Security-focused Chemring, given the UK’s plan for six new energetics factories and a £1.8bn investment in the ‘digital targeting web’ for the armed forces.
Of great interest here are recent moves by Albion River Management. The US private equity house has become Chemring’s largest shareholder after building up its stake. Watch this space.
The shares are sitting nearly a fifth below the FactSet consensus. A re-rating could be available, with analysts pencilling in earnings per share (EPS) growth of 23 per cent in FY2027 and 17 per cent in FY2028.
A glance across industry valuations highlights that defence technology specialist QinetiQ is relatively unloved by investors.
The company generated almost three quarters of revenue domestically last year, but expansion in the US (which includes a misfiring acquisition) has been causing it problems. Still, the rating looks unjustifiably low, a core reason we have flagged it as an attractive long-term play.
The biggest pure-play defence option is industry behemoth BAE Systems (BA), which takes almost half its revenue from the US. We have stuck with our Hold recommendation here, with valuation considerations central. The shares trade on a price/book valuation of 4.4 times this financial year, against a five-year average of 3 times.
As the graph shows, Rolls-Royce (RR.) is richly valued against peers. However, it’s far from a pure-play defence option. The company took 24 per cent of underlying revenue from defence last year, against more than 50 per cent from civil aerospace. Check out Phil Oakley’s recent analysis of its prospects here, where he takes a view on whether the rating is worth it. Rolls-Royce boosted defence orders by a fifth in the first quarter of 2026.
For sector investors keen to cast their net further, there are smaller London-listed defence operators available too.
Names here include protective equipment specialist Avon Technologies (AVON), which is more exposed to the US. Funding delays across the Atlantic supported our Hold position. The shares are down by a fifth over the past year.
Another option is Cohort, which provides equipment in the marine and land spaces. The company has annual results out on 16 July, so look out for our reaction next week. We recommended taking advantage of the sell-off late last year, and that call has paid off so far.
Sector momentum may have come off the boil this year, but as this overview highlights there are a range of defence names which could still offer significant upside ahead.