As Trump enters the White House, this UK share looks at least 19% undervalued to me!

On the day that Donald Trump takes office for the second time, our writer thinks there’s one UK share that stands to gain more than most.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

The flag of the United States of America flying in front of the Capitol building

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If President Trump carries through his threat to impose tariffs on all imports into the US, many UK shares will suffer. His promise to “put America first” resonated with the majority of voters. But it could spell trouble for a number of companies on this side of the Atlantic.

However, there’s one stock that I think will do particularly well from Trump 2.0, regardless of whether he introduces import taxes targeted at the UK. That’s because of his wish to make NATO members increase the proportion of their national incomes spent on defence.

Presently, the 32 members have pledged to spend at least 2% of gross domestic product on military hardware and personnel. However, Trump wants them to go further.

Should you invest £1,000 in Vodafone right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Vodafone made the list?

See the 6 stocks

On 7 January, he told a press conference: “I think NATO should have 5% … They can all afford it, but they should be at 5%, not 2%.

Given that the US ‘only’ spends 3.4%, this might sound a bit unfair. However, the point that Trump’s clearly making is that he expects others to spend more so that America can spend less.

This means defence stocks with major US contracts could see a fall in their revenues.

One possible beneficiary

However, a company like Babcock International Group (LSE:BAB) could prosper.

During the year ended 31 March 2024 (FY24), the group earned 70% of its revenue from the UK. It also generated a further 6% from France and Canada, both NATO members.

The group’s exposure to the US is very small and comes primarily from the supply of components to its submarine fleet.

Encouragingly for the group, the UK government has started a Strategic Defence Review and has promised to “set out the path to spending 2.5% of GDP on defence”.

Although this is a long way short of Trump’s 5%, it’s likely to benefit Babcock as governments generally like to keep defence spending local. The group is currently the second largest supplier to the Ministry of Defence.

And now could be a good time for me to invest.

Based on its FY24 earnings, Babcock currently trades on 16.3 times its historical profit. However, this is lower than, for example, BAE Systems (19.5).

If it could attract the same multiple as its larger rival, its market cap would be 19% higher. And with Trump back — and the UK government committed to spending more on defence — I see no reason why this couldn’t happen.

Created with Highcharts 11.4.3Babcock International Group Plc PriceZoom1M3M6MYTD1Y5Y10YALL20 Jan 20204 Apr 2025Zoom ▾Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '24Jan '252021202120222022202320232024202420252025www.fool.co.uk

My plan

But I have concerns. The group recently reported £90m of “cost overruns” on the building of five ships for the Royal Navy.

And its dividend is miserly.

Also, I know that investing in the sector isn’t everyone’s cup of tea. But it’s over 4,000 years since the first army was established which, unfortunately, tells me that global conflicts are here to stay. And I believe the first act of government is to protect its people.

That’s why I’ve put Babcock on my watchlist for when I next have some spare cash.

With its impressive 26% return on capital employed (FY24), £9.5bn contract backlog (30 September 2024), and relatively low level of gearing, I think Babcock’s well placed to benefit from Trump’s second term and the UK government’s commitment to spend more on defence.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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.

James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended BAE Systems. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Pound coins for sale — 51 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More on Investing Articles

Dividend Shares

Of the 20 highest-yielding FTSE 100 stocks, this is my top pick

This FTSE 100 stock currently offers a yield of 6.4%. But Edward Sheldon believes it’s capable of providing share price…

Read more »

Investing Articles

Could Tesla’s share price jump over the next 12 months? These analysts think so!

Tesla's share price has fallen by almost a third since 1 January. But optimism is high that Elon Musk's company…

Read more »

Investing Articles

I asked ChatGPT where the FTSE 100 will be in 6 months: here’s what it said…

Let’s be realistic, ChatGPT can’t predict the future. But it did do a good job of compiling data from brokerages…

Read more »

Investing Articles

Could the Rolls-Royce share price hit £10?

The Rolls-Royce share price has taken most analysts by surprise with almost everything going right for the British engineering giant.

Read more »

Investing Articles

4 REITs Fools own for passive income

REITs often have higher-than-average dividend yields compared to other stocks, making them a solid choice to consider for passive income…

Read more »

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »