I’ve long argued that Babcock International (LSE:BAB) shares have been unjustly overlooked as investors have piled into industry peers like BAE Systems. But the FTSE 250 share is having its moment in the sun today (6 February) after releasing another robust market update.
At 500p per share, Babcock’s share price is currently up 10.4% in Thursday trading. It’s been driven by a strong Q3 statement and upgrades to earnings forecasts.
And I believe the defence giant has much further to go. Here’s why.
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Forecasts bumped up
Babcock provides support, engineering and training services to armed forces chiefly in the UK, Australia and South Africa.
It also provides services for the civil market. That includes building nuclear power plants and cargo handling systems for commercial shipyards and shipowners.
Right now, it’s on a roll across both sides of the business.
On Thursday, it said a strong H1 “continued throughout the third quarter of the year,” adding that “the preliminary view of performance in the month of January is also encouraging.”
A majority of revenue for the financial year (to March 2025) is under contract. And having reviewed its delivery forecasts, it “expects both revenue and underlying operating profit to exceed the top end of the range of analyst expectations.”
Full-year sales of £4.9bn are expected. Underlying operating profit is tipped at the higher end of between £327.1m and £339.7m.
Civil and defence strength
Babcock’s recent success is thanks chiefly to strong trading at its Nuclear and Marine divisions.
At Nuclear, it said “growth is driven by increased new–build and decommissioning work in civil nuclear, as well as increased submarine support activity and higher than originally expected infrastructure revenues.”
Marine growth is being boosted by “higher LGE [liquified gas equipment] volumes as well as the ramp-up of the Skynet programme.” It took over the operations and management of Skynet — the UK’s military satellite communications system — last March.
Robust outlook
Today’s update underlines the benefits of Babcock’s wide range of services and its excellent record of execution. As well as reducing reliance on one sector, its presence in civil and defence markets provides the firm with exceptional growth opportunities.
It’s benefitting from soaring arms spending across the globe. This is a trend that looks set to continue as the geopolitical landscape becomes more fractured and new dangers arise.
Roughly three-quarters of its portfolio is geared towards defence applications. Meanwhile on the civil side, I’m expecting strong demand for its nuclear services to continue as the UK switches away from fossil fuels.
City analysts are confident too. They think the company will follow a 42% earnings rise this financial year with increases of 13% and 10% in fiscal 2026 and 2027, respectively.
After recent momentum, I wouldn’t be surprised to see these short-to-medium term forecasts upgraded either.
A FTSE 250 bargain
Despite today’s rise, Babcock shares still look dirt cheap on paper. A sub-1 price-to-earnings growth (PEG) ratio of 0.4 leaves plenty more scope in my opinion for more share price gains.
Risks here include supply chain problems across the defence sector and intense market competition. But on balance, I think it looks in great shape to keep rising. So I believe it’s worth serious consideration from savvy share investors.
