These FTSE 100 shares trade on rock-bottom earnings multiples. Are they unsung heroes that investors should buy in September? Or are they classic value traps?
Babcock International
Outgoing UK defence secretary Ben Wallace predicted this week that “the world will get more insecure and more unstable” over the next decade. It’s a widely-held belief in the West that suggests buying defence stocks like Babcock International (LSE:BAB) could be an effective strategy for investors.
The company sells products and services not just to the UK but also to Australasia, Canada, France and South Africa. These include parts for ships and submarines, through to complete weapons systems. It also provides training for operations across land, air and sea, as well as engineering support.
Such a broad range of offerings to multiple countries helps reduce risk and provides extra avenues for growth. And it’s serving Babcock well right now. Its contract backlog rose 7% organically in the 12 months to March, to £9.5bn.
Project execution problems can be common for defence contractors. But City analysts are still forecasting Babcock’s earnings to more than double in financial 2024, and to rise 12% in each of the next two years.
This leaves the company trading on a price-to-earnings growth (PEG) ratio of 0.1 for this year. The firm trades below the bargain watermark of 1 through to fiscal 2026 too. I think this is a great stock to own for the long haul.
The Berkeley Group
Shares of The Berkeley Group (LSE:BKG) also look ultra cheap at current prices. Today the housebuilder trades on a forward price-to-earnings (P/E) ratio of 11.3 times. It also sports a large 5.7% dividend yield, well ahead of the FTSE average of 3.8%.
I already own several FTSE 100 housebuilders in my Stocks and Shares ISA. I bought them on account of a strong long-term outlook for the country’s housing market.
Yet I’m reluctant to buy more of these cyclical shares for my portfolio today. This is because the scale of the housing market downturn is yet to be known as interest rates head relentlessly higher
Most recent evidence from Nationwide gave a chilling indicator on the health of the market though. The building society announced last week that average home values slipped 5.3% in August. This was worse than expected, and represented the biggest fall since 2009.
The Bank of England is tipped to keep raising rates until the end of the year at least, making it more and more expensive to buy a home. And with the UK economy showing signs of cooling, things don’t look good for Berkeley.
City analysts expect annual earnings to fall 16% this year (to April 2024), and by an extra 8% in financial 2025. But the possibility of far greater falls means I’d rather buy other UK shares today. A significant downturn could have serious implications for shareholder returns beyond the near term.
