Babcock International Group plc looks cheap after posting solid growth

We could be looking at a cheap growth opportunity in Babcock International Group plc (LON: BAB).

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We’ve seen some market turmoil in recent months, but we should cut through it and examine how our companies are shaping up for the long term. Here’s a contrast inspired by today’s results.

A cyclical bargain?

Babcock International Group (LSE: BAB) posted an impressive set of first-half figures, though its share price has barely moved and stands at 994p. The engineering support firm, which works extensively with the UK’s armed forces, reported a 7% rise in adjusted pre-tax profit to £228.4m, with adjusted earnings per share up 8% to 37.2p — statutory figures were even better, with 12% and 15% rises respectively.

The interim divided was lifted by 7% to 6.5p, which keeps us on track for the 2.9% yield currently forecast — not a massive yield, but it’s nicely progressive and should be very well covered by earnings.

The only downside I see is debt, which stands at £1.29bn. That was down 2% and is probably not too bad for a £4.9bn company, but I’d like to see it falling further. Still, free cash flow looks good, and an order book of £20bn means we have pretty clear visibility of future revenue and that adds nicely to the safety of Babcock as an investment.

The share price has been in a slow slide since early 2014, but the defence sector looks like one that should be strengthening in the coming years, and I reckon we’re looking at a good opportunity to buy into it now.

Although Babcock is mostly focused in the UK, it does have some international reach too, and that could provide expansion possibilities for the future — chief executive Archie Bethel told us “…we see growing international demand for our specialist and complex engineering support services.

Babcock shares look good value to me.

Brexit effect

Bunzl (LSE: BNZL) is an interesting comparison. Just as investors deserted financial stocks in the wake of the Brexit vote and depressed their prices, so they flocked to safer investments and pushed those prices up. Bunzl is into food packaging and cleaning materials, and that’s pretty safe — and Bunzl shares saw a sharp uplift.

But as rationality set in again and investors realised the sky wasn’t actually falling, and financial stocks started to recover, so some of the high-flying safe havens fell back to earth again. And after an up-and-down ride, Bunzl shares are now 3% down overall since the EU referendum.

Does that mean they’re good to buy? Well, I’m attracted to that safety aspect, and though the firm’s dividends are modest at around 2%, they’re also progressive and should be well covered. But we’re still looking at P/E multiples of around 18-19, which seems like a bigger premium than is really justified.

I also think that waiting until a disastrous event has occurred and then rushing for safety is a bad strategy. We should have the safety aspects of our portfolios sorted out in advance for the long term, and then take advantage of panic selling to buy up shares that the crowd has irrationally shunned — you’d have done better buying punished bank shares in the weeks after the referendum than piling onto the overcrowded safety bandwagon.

While I see Bunzl as a good and well managed company, I think there are much better bargains out there.

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.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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