Why I Would Buy Babcock International Group PLC But Sell WM Morrison Supermarkets PLC And Thorntons plc

Royston Wild runs the rule over Babcock International Group PLC (LON: BAB), WM Morrison Supermarkets PLC (LON: MRW) and Thorntons plc (LON: THT).

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Today I am highlighting the investment profile of three FTSE-listed headline grabbers.

Babcock International Group

Engineering giant Babcock International (LSE: BAB) has boosted the market in Monday trading and was recently 2% higher on the day. The business announced that revenues leapt 27% in the 12 months to March 2015, a result which drove pre-tax profit almost a third higher to £417.7m.

Babcock noted that the result of “major contract wins and by expanding the size and scope of existing contracts” helped to drive performance last year, and with the order book leaping an eye-watering 74% to £20bn, I believe that the London firm should keep on punching terrific growth. This view is shared by the City, and the engineer is expected to enjoy earnings rises of 12% and 11% in 2016 and 2017 correspondingly.

As a consequence Babcock changes hands on a great P/E multiple of 14.2 times prospective earnings for this year — any reading below 15 times is widely considered stellar value for money — and this drops to just 12.8 times for 2017.

WM Morrison Supermarkets

More industry data, yet more reasons to sell battered grocery business Morrisons (LSE: MRW). The Bradford firm saw sales slip a further 1.1% in the 12 weeks to April 26, according to Kantar Worldpanel, as the rip-roaring progress of budget chains like Lidl and Aldi continues to embarrass the established chains.

And Morrisons was given further cause for worry after retail researcher the Local Data Company announced that almost half of the company’s stores were situated in towns with an above-average number of discount stores, more than any of its industry rivals and leaving it susceptible to further customer slippage.

Given that the top line looks set to keep on deteriorating, I believe that current earnings forecasts for Morrisons are wildly optimistic, with the business expected to follow a 4% earnings turnaround for the year ending January 2016 with a 19% surge in 2017. And the supermarket is not exactly cheap, either, with Morrisons carrying P/E multiples of 15.5 times and 13.4 times for these years — I would consider a reading around or below the bargain benchmark of 10 times to be a fairer reflection of the risks facing the retailer.

Thorntons

Chocolate house Thorntons (LSE: THT) has suffered a sobering start to the week after chief executive Jonathan Hart announced his plans to exit the business in June. Shares in the business were recently dealing 2.1% lower, bucking the surge of recent months as investors scratch their heads over whether the company’s transformation strategy is paying off.

The chocolatier has shuttered swathes of its own-branded shops in recent years as its drive towards selling pre-packaged, premium chocolate bars in supermarkets has clicked through the gears. But the dragging performance of Britain’s leading retailers has weighed considerably, and Thorntons’ total FMCG revenues ducked 6.7%, to £26.5m, in the 12 weeks to April 25. Consequently the company warned that “we remain cautious about the outlook for the full year.”

Given that a revamp of Thorntons’ existing revamp may be in order — indeed, the City has pencilled in a 28% earnings dip for the year concluding June 2015 — I reckon a P/E multiple of 15.4 times fails to factor in the huge work that needs to be undertaken, not to mention the uncertainty swirling over the company’s direction following Hart’s departure.

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.

Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares of Thorntons. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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