We have some exciting news to share! The Motley Fool UK has now become The Twelfth Magpie -- an independent, UK-owned company, led by our long-serving UK management team — Mark Rogers, Chris Nials and Heather Adlington. In practical terms, it’s the same team you know, now fully focused on serving our UK readers and members.

Just as importantly, our approach remains unchanged: long-term, jargon-free, and on your side. This site is our new home, and there will be extra tweaks made across the coming few days as we settle in. So if anything looks a little off, please bear with us!

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Are BAE Systems shares the best UK industrials investment going into 2026?

Dr James Fox takes a closer look at BAE Systems shares and the alternatives following an impressive 2025 and as we move into a new year.

| More on:

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

BAE Systems (LSE:BA.) shares are up 47% over the past 12 months. The last three years have been incredibly strong, but that’s hardly surprising when we consider that there’s a war in Europe and western powers have largely increased defence spending.

               

XXX

The company falls into the industrials sector, and it’s the second-largest listed company in this segment in the UK. The largest is Rolls-Royce. But these are by no means the only companies here.

So, how does BAE compare and which stocks look the most attractive going into 2026? Let’s explore.

What the data tells us

Here’s a list of the important data comparing BAE with some of its UK-listed peers.

CompanyP/E (Fwd Year 1)P/E (Fwd Year 2)PEGNet debt (£)Dividend yieldOperating margin
BAE22.920.41.9£7bn2.1%9.9%
Rolls40.935.52.7–£1.1bn0.8%18%
Bodycote16.114.41.4£170m3.3%6.7%
Melrose18.414.90.8£1.7bn1.3%14.5%
Babcock22.620.42£364m0.7%8.4%
Chemring22.718.3n.a.£89.1m1.81%14.8%

This list is by no means exhaustive, but it’s always good to compare. We could also used this data to rank these companies, assigning scores for each metric. That’s how a lot of screeners work.

Personally, I think Melrose Industries stands out, primarily due to its price-to-earnings-to-growth (PEG) ratio. The PEG ratio is calculated by dividing the forward price-to-earnings (P/E) ratio by the expected earnings growth rate over the medium term.

The concept was popularised by legendary investor Peter Lynch, who argued that a company’s valuation should be judged in the context of its growth prospects. By adjusting the P/E ratio for expected earnings growth, the PEG aims to highlight shares that may be mispriced relative to their underlying growth potential.

Historically, a figure under one has suggested good value. But in reality, it needs to made relative to the sector and take into account net debt/cash and dividends for a better idea of balance sheet health and total returns.

So, broadly, what else do I take from the data? Well, Babcock and Chemring don’t interest me much. The numbers are fine but don’t excel.

Rolls-Royce clearly looks the most expensive, but operationally it’s on a high. Operating margins are getting stronger and the company keeps on exciting shareholders.

BAE looks quite middling to me. Like Babcock and Chemring, I’m not seeing a huge amount to get excited about.

For me, Bodycote also stands out for the right reasons. The PEG ratio combined with the dividend yield points to an undervaluation. Operating margins could improve, however.

Could Melrose and Bodycote outperform BAE in 2026?

Looking at this data, I believe there’s some cause to believe the Melrose and Bodycote share prices could outperform BAE in 2026. Operationally, I also think Bodycote has some interesting exposure to data centres and even space exploration — two mega themes going forward.

However, there’s plenty to keep an eye on. Melrose and Bodycote have manageable debts, but these are worth watching as we move forward. Both companies could also be negatively impacted by increasing UK energy prices. These are already high and it’s incredible that successive governments have failed to address this.

Personally, I think both Melrose and Bodycote are worth considering as we move into 2026.

James Fox has positions in Melrose Industries Plc and Rolls-Royce. The Motley Fool UK has recommended BAE Systems, Bodycote Plc, Chemring Group Plc, Melrose Industries Plc, and Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Friends and sisters exploring the outdoors together in Cornwall. They are standing with their arms around each other at the coast.
Investing Articles

£503 buys 14 shares in this FTSE 250 stock that returned 23.9% annually for the last 15 years

This FTSE 250 stock has averaged a huge return for 15 years. At today's price, £503 buys 14 shares. But…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

£1,000 buys 25 shares in this FTSE 100 stock that’s returned 29.2% annually for the last 10 years

This FTSE 100 mining stock has returned close to 30% a year for a decade. At 3,995p, £1,000 buys 25…

Read more »

Female student sitting at the steps and using laptop
Investing Articles

Down 47%, is this growth stock finally worth buying in May?

With a £288m order book and a hidden pipeline of defence and nuclear contracts, is this growth stock now too…

Read more »

House models and one with REIT - standing for real estate investment trust - written on it.
Investing Articles

2 REITs yielding 7%+ to consider for passive income in 2026

A REIT backed by the NHS and another backed by Tesco and Sainsbury's with both yielding 7%+. Here's why I'm…

Read more »

Woman riding her old fashioned bicycle along the Beach Esplanade at Aberdeen, Scotland.
Investing Articles

Just 97 shares of this UK dividend stock generate £238 in passive income

A 5.7% yield, £238 in passive income from just 97 shares, and one of the most divisive dividend stocks on…

Read more »

ISA coins
Investing Articles

£10,000 in an ISA generates a second income of…

The London Stock Exchange is home to some of the world's most generous dividends. But how big a second income…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

Expert recommendations: 2 top income stocks yielding 7%+!

With yields of 7.2% and 7.8% respectively, these two income stocks are catching the eyes of institutional analysts. Should investors…

Read more »

Illustration of flames over a black background
Investing Articles

3 top income-focused stocks to buy in May 2026, according to experts

Looking for a stock to buy for income in May 2026? Experts have flagged these three UK dividend shares as…

Read more »