FTSE 250 incumbent Babcock International (LSE: BAB) has seen its share price take off in the past few months. Have I missed a trick or could I still buy shares now with a view to them continuing their ascent? Let’s take a closer look.
Better than expected results
International defence business Babcock is a mammoth in its own right. With over 26,000 employees spanning many countries, it provides a plethora of products and services to its clientele across the defence industry.
As I write, Babcock shares are trading for 422p. Over a 12-month period, they’re up 48% from 284p to current levels. They remained pretty consistent, until June, when they began to climb sharply. They’ve risen 56% to date, from 271p to current levels. A full-year results announcement made for excellent reading, which helped propel the shares upwards.
The investment case
Breaking down the results, Babcock reported that revenue increased by close to 10% compared to the previous year. Furthermore, it managed to boost the coffers with lots of cash, more so than it expected. The business said in previous updates it was looking to solidify its balance sheet, and it has done that.
Looking forward, there are some real bullish aspects that make Babcock shares hard for me to ignore. It has a large order backlog of over £10bn. This could help the business boost performance and growth for years to come.
Finally, Babcock has excellent relationships with major governments, many of whom are the top defence spenders across the globe. It’s worth noting that recent tragic events have sparked fears of further conflicts. Plus, defence spending is nearing all-time highs and shows no signs of slowing down.
Now, I would never look to profit from tragic geopolitical events or war. A speedy and peaceful resolution to all conflicts is something I hope for. Plus, there’s a lot more to defence than just weapons for conflicts.
Moving to the bear case then, Babcock’s recent share price ascent has made the stock look a tad pricey on a price-to-earnings ratio of 27. This is higher than the FTSE 250 index average. Any negative news or a product failure, for example, could send the shares tumbling.
Finally, Babcock does have a fair bit of debt on its balance sheet to tackle. It has managed to make good inroads towards paying this down recently. However, in a high interest environment, like now, debt can be costlier to service. This can impact performance, returns, sentiment as well as growth aspirations too.
What I’m doing now
I wish I owned Babcock shares prior to the results in June. However, as my Mum used to say, there’s no point crying over spilt milk. I’d still buy Babcock shares when I next have some spare cash to invest.
I think Babcock can continue its good run of late. With its wide profile, market position, order backlog, as well as recent excellent cash generation, the future looks bright if you ask me.
