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Rolls-Royce holdings (LSE: RR.) has cleaned the ground with the BAE Systems (LSE: BA.) share price in the last two years, an increase of 500% compared to just 55%.
But it's easy to forget how far the price of Rolls fell before all this happened.
In five years, BAE's share price has risen 125%. But after its huge drop in the 2020 stock market crash, Rolls shares are up just 110% overall.
Value comparison
I have been closely watching the valuations of the two and what the forecasters have predicted for them.
On some fundamental measures, BAE looks like the better option to consider even after that five-year outperformance.
The exam also teaches me a key lesson. When we compare them today, we are looking at two very different companies than those of five years ago.
So we need to forget what we knew. We should consider Rolls' enormous two-year growth as a past fact and nothing more (and certainly not as a guide to future performance). And see how the two compare now.
Face to face
The table below shows how analysts view the two companies' earnings per share (EPS), price-to-earnings (P/E) ratio, and dividends over the next three years.
| Company | BAE Systems | Rolls-Royce |
| EPS growth in 2024 | +8.3% | -38.3% |
| Spring/Summer 2024 | 19.8 | 30.5 |
| Dividend yield 2024 | 2.5% | 1.0% |
| Dividend coverage 2024 | 2.0x | 3.4x |
| EPS growth in 2025 | +12.4% | +12.9% |
| Spring/Summer 2025 | 17.6 | 26.9 |
| Dividend yield 2025 | 2.7% | 1.2% |
| Dividend coverage 2025 | 2.1x | 3.1x |
| EPS growth in 2026 | +11.3% | +15.0% |
| Summer 2026 | 15.9 | 23.4 |
| Dividend yield 2026 | 3.0% | 1.5% |
| Dividend coverage 2026 | 2.1x | 2.8x |
How they accumulate
Looking at those figures, we can see that Rolls-Royce will post a drop in profits this year. It should grow again next year. But even with that, by 2026 we still won't see earnings per share return to the 2023 level.
Meanwhile, BAE should easily overtake Rolls in three-year total earnings growth by 2026.
BAE is also way ahead when it comes to dividends. However, Rolls is just getting back into that game, with plenty of coverage through earnings. A few years later, I was able to see them both side by side.
Where BAE does well is in those P/E ratings. The stock appears to be better value in that regard, with considerably more potential growth seemingly built into Rolls-Royce's share price.
Be careful with that debt
But this is where Rolls-Royce excels, in a way I wouldn't have thought possible just a couple of years ago.
Net debt is forecast to soar to £6.3bn at BAE this year, and only slightly less, £6bn by 2026. Rolls-Royce, by contrast, looks set to return to net cash. Debt had been reduced to just £800m halfway through this year.
Would you buy?
This year, the two of you are enjoying a very positive feeling that could keep you flying. But I will postpone both for now and hope to have better buying opportunities in the future.
