Director dealings of FTSE 250 stocks can give some extra insight into what management thinks of its business. When insiders start buying, it’s usually a strong indicator that they’re confident about long-term performance. But when they start selling, then it could suggest something’s going wrong.
So I was intrigued to see Babcock International (LSE:BAB) CFO David Mellors selling around £1.4m worth of shares at the start of September. And he wasn’t the only one. Just a week before, CEO David Lockwood sold almost £2.1m worth of shares!
Needless to say, seeing the top two executives in a company sell enormous blocks of shares is worrying. Do they know something we don’t? And should investors follow in their footsteps?
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What’s going on at Babcock?
2024’s been a relatively good year for Babcock shareholders. The defence enterprise has seen its share price rise by more than 15% since January, even after suffering a bit of a tumble on its latest results.
Like-for-like revenue’s moving up by double-digits. And thanks to considerable margin expansion, underlying operating earnings jumped from £177.9m to £237.8m between March 2023 and March 2024. Pairing this with a £10.3bn contracted backlog, the company’s hardly short on customer orders, nor is that likely to change given the rise in geopolitical conflicts around the world.
But the earnings weren’t perfect. Trouble continues with its contract to build frigates for the Ministry of Defence. The sudden rise of raw material, labour and energy costs, among other overhead expenses, has caused this contract to go way over budget. And since the pricing’s fixed, the group’s suffered a £100m loss on the deal in its 2023 fiscal year. Now, another £90m’s just evaporated.
Despite this expensive hiccup, Babcock’s financial position’s still moving in the right direction. A surge in free cash flow has enabled management to continue tackling the firm’s pension deficit, and net debt’s fallen drastically over the last four years.
Obviously, that’s all rather positive. So why are the CEO and CFO selling millions of pounds worth of shares?
Inspecting the director trades
Looking at the regulatory filings, both Mellors and Lockwood don’t appear to be jumping ship. Both directors recently received their annual compensation packages, which included awards of 586,808 and 838,292 shares respectively. And roughly half of these awards were sold off to convert them into cash.
Overall, both directors have actually increased their net stake in Babcock, further aligning their interests with shareholders, which is an encouraging sign.
So should investors consider selling? If I were a shareholder in this FTSE 250 enterprise, these director deals wouldn’t be enough evidence for me to start clipping my position. Instead, I’d look for other warning signs that might indicate operational problems. For example, if the balance sheet deleveraging, pension deficit, or order fulfilment suddenly start moving in the wrong direction.
