With earnings up almost 75%, this FTSE 250 company looks like a stock to consider now

After strong full-year results and a positive outlook statement, this FTSE 250 stock may need to catch up with the good news.

| More on:

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.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

August’s V-shaped wobble in the stock market has left some FTSE 250 stocks languishing when I reckon they ‘should’ be motoring upwards.

One example is defence-themed company Babcock International (LSE: BAB). The shares haven’t made much progress despite the release of what looked like a fine set of results at the end of July.

If general market conditions had been better, it’s possible the stock might have risen more in August. But the fact it hasn’t may be an opportunity for investors to research and consider the business now.

The company reported “strong” progress for the 12 months to 31 March 2024. Operating profit and free cash flow were both much higher than the prior year. Meanwhile, underlying basic earnings per share shot up by almost 75%.

Chief executive David Lockwood said the firm made good strategic progress during the year and cash flow was “ahead of expectations“.

Trading well

That’s what investors like to hear: a business that’s outperforming its directors’ own assumptions.

However, it’s easy to become over-cautious and angst-filled, leading to fear that such strong trading can’t possibly continue!

Of course, it may not. But equally, it could. Reversion to the mean isn’t always an instantaneous effect! The whole sector looks robust right now and that current is likely to be helping Babcock along.

Lockwood said the business is “well positioned” to benefit from the “the sustained uplift” in global defence budgets. Many countries need to re-equip and modernise their militaries and that situation opens up ongoing opportunities for the firm.

Babcock provides services and products in the defence, aerospace and security sectors. Lockwood reckons the firm combines engineering know-how, customer intimacy and operational asset knowledge. All that helps to drive collaborative relationships and product development capability.

It’s a set-up that’s “increasingly attractive” to customers, Lockwood said, and the directors are confident about meeting the firm’s medium-term targets.

Strong earnings forecast ahead

City analysts expect a bumper year for normalised earnings in the current trading year to March 2025 — think an increase of just over 50%. There’s also likely to be a double-digit percentage advance the following year.

However, one of the risks facing a business like Babcock is that it may mess up on one or more of its fixed-price contracts. If the original cost estimates prove to be incorrect, profit margins can disappear and the company may miss its earnings expectations.

On top of that, many of the firm’s large customers are national governments. So a change in policy in the future may deplete Babcock’s order book.

Nevertheless, with the share price near 530p, the forward-looking price-to-earnings multiple for next year is just below 11.

I don’t believe that valuation looks excessive, so would be keen to dig in with further research now with a view to considering the stock for inclusion in a diversified portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Middle-aged black male working at home desk
Investing Articles

1 of my favourite UK dividend shares this December!

Diageo's one of the best dividend growth shares in my Stocks and Shares ISA. At current prices I'm considering buying…

Read more »

Investing Articles

3 REITs I’d consider buying to target a long-term second income

I'm seeking ways to make a market-beating second income. These real estate investment trusts (REITs) could be just what I've…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

2 shares I changed my mind about in today’s stock market

This writer explains why he changed his opinion on these two shares, even though both are highly valued in today's…

Read more »

Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »