Many FTSE 250 stocks are struggling due to macroeconomic issues causing market volatility. I noticed that Babcock International (LSE: BAB) shares have spiked since the end of last month. What’s happened, and could now be a good time to buy some shares for my holdings?
Defence products
Babcock is an international defence company with over 26,000 employees. It provides a multitude of products and services to its clientele. The primary aim is to drive improvements in performance, availability, cost, and delivery. Some of these products and services include engineering support, weapons handling systems, communications solutions, air defence, and more.
As I write, Babcock shares are trading for 375p. At this time last year, they were trading for 334p, which is a 12% increase over a 12-month period. Since the end of July, the shares have increased by 40% after positive full-year results were announced. In comparison, the FTSE 250 index has fallen by 5% in the same period.
Positive results, outlook ahead, and risks to consider
It’s not hard to understand why Babcock shares jumped after last month’s announcement of full-year results. The business said revenue jumped by close to 10% and it recorded better than expected cash generation. One of Babcock’s aims for the fiscal year was to shore up its balance sheet. Through such high levels of cash generation, it was able to do that. In addition to this, it managed to substantially pay down debt levels.
In terms of the outlook ahead, I’m bullish on Babcock shares for a few key reasons. To start with, the business has a big order backlog, close to £10bn worth in fact. This should mean it can continue to record stable earnings and potential shareholder returns. Defence spending has also reached record highs in recent years. I’m not one to advocate profiteering from war or uncertain times, but there is much more to defence spending than weapons.
Finally, I’m buoyed by Babcock’s deep-rooted relationships with worldwide governments, some of its biggest clients. These could be lucrative and boost future earnings.
From a bearish perspective, Babcock shares do look a bit pricey on a price-to-earnings ratio of 21. This is higher than the FTSE 250 index average. If trading levels were to drop or there were any operational issues, the shares could fall.
Furthermore, Babcock does still have debt to manage and pay down on its balance sheet. Although it has shown great ability to pay this down recently, debt is still risky in a high interest environment, like now. This is because servicing the debt can be costlier, which eats into profit margins. These profits underpin shareholder returns and growth initiatives.
A FTSE 250 stock I’m going to watch
After reviewing the pros and cons, I’ve decided to put Babcock shares on my watch list. I’m a fan of the business and see plenty of positives, including the recent trading update and the state of the defence market globally.
Babcock’s current high valuation, lack of a passive income, and debt levels are putting me off. I believe I can buy better FTSE 250 stocks out there right now for my holdings. However, I’ll be keeping a close eye on developments.
