I reckon there are some excellent value stocks to be had at the minute due to economic and geopolitical volatility.
One FTSE 250 defence stock I want to take a closer look at is Babcock International (LSE: BAB).
Should I buy or avoid the shares?
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Defence provisions
Babcock is a support services business that helps with training and support for armed services personnel as well as engineering.
The shares have been on a fantastic run of late, largely in part due to geopolitical issues, and increased defence spending. Over a 12-month period they’re up 28%, from 386p at this time last year, to current levels of 496p.
Despite the boost they provide to defence businesses, including Babcock, I must admit I do hope there is a peaceful resolution to all current conflicts. Furthermore, it’s worth remembering that defence spending encompasses more than weapons for wartime.
The good stuff
Looking at the current state of the sector as a whole, Statista recently reported that defence spending across the planet is at all-time highs. Plus, this shows no signs of slowing down. I reckon this is good news for firms like Babcock who can capitalise to grow earnings and returns.
Moving onto Babcock specifically, results for the year ended 2023 in March were positive, in my view. The key takeaways I took included organic sales increased by 11% compared to the same period last year. Furthermore, its order backlog rose by 8% to over £10bn. This is key, as it shows the business has plenty of traction ahead, and earnings visibility is clearer.
Digging into some fundamentals, I use two main metrics to value stocks, and both indicate Babcock shares are value for money right now. The shares trade on a price-to-earnings ratio of just over 12. Furthermore, a price-to-earnings growth (PEG) ratio of 0.5 is attractive. It’s worth remembering a reading below one indicates value for money.
Next, a sign that Babcock is doing well is the fact it recently reinstated its dividend. At present, a dividend yield of 1% isn’t the highest, but it could grow. However, I do understand that dividends are never guaranteed.
Risks and my verdict
One of my concerns is related to shipping constraints, as we’ve seen in the issues close to the Suez canal. These issues could impact Babcock from delivering orders, and hurt earnings and returns.
A lesser concern is the fact that if all conflicts were to be resolved tomorrow, defence spending could plummet. I appreciate there is a slim chance of this happening, but it’s still a risk nevertheless.
Overall, I like the look of Babcock shares and think buying some now could be a savvy move. The attractive valuation, burgeoning sector, and reinstated dividend help me make my decision. Plus, Babcock shares could be a cheaper, alternative way to access defence stocks, compared to bigger, more expensive stocks like BAE Systems.
