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Why Lloyds Banking Group PLC & Babcock International Group PLC Are Trading Far Too Cheaply

Today I am looking at two FTSE 100 titans delivering brilliant value.

A bankable bargain

Investor appetite for banking goliath Lloyds (LSE: LLOY) has steadily eroded since the onset of the summer, and the stock is currently trading at a 15% discount to levels seen just six months ago. Prices were hardly handed any favours by October’s financial update, either, which showed underlying profit dip 8% in July-September, to £1.97bn.

The impact of massive restructuring played some part in Lloyds’ disappointing performance, although a poor showing at its Commercial Banking arm also contributed to the dip. On top of this, a further £500m charge related to the ongoing PPI saga hardly gave investors much to cheer, either.

Despite these problems, I believe that Lloyds can still be considered a solid ‘buy’ candidate. Sure, the impact of asset sales has significantly reduced the bank’s growth prospects versus those of its competitors. But these measures have also significantly de-risked the bank, not to mention created a leaner, more efficient earnings-creating machine for the years ahead.

Lloyds is expected to enjoy a 4% earnings bounce in 2015 before swallowing a 7% dip the following year, creating ultra-low P/E ratings of 8.7 times and 9.4 times correspondingly. At these levels it can be argued that the risks of a cooling UK economy are more than factored into the price. Furthermore, projected dividends of 2.4p per share for 2015 and 3.8p for 2016 yield a chunky 3.3% and 5.1% respectively, numbers that should also pique the interest of savvy bargain seekers.

Supporting spectacular returns

Support services provider Babcock International (LSE: BAB) has also suffered from sinking trader appetite in recent months, and the stock has shed 15% since the start of June. Although prices have recovered some ground since then, I believe the business can still be considered an excellent value pick.

As one would expect, a steady flow of capex reductions across the oil and gas industry has dented sentiment towards Babcock for many months. And the London firm added to these concerns in July by advising that it expects “oil and gas revenue to undergo a low double digit decline in the first half of the year” thanks to project delays and cancellations.

But the energy industry is responsible for only a small percentage of Babcock’s total revenues, as the business provides services across a broad swathe of industries in both the public and private sectors. For one, Babcock supplies military training and infrastructure and equipment support across the UK’s three armed forces, and just last month inked a five-year contract with the MoD to supply engineering services to Royal Navy air stations in the south-west of England. The deal is worth around £100m per annum.

Backed up by a colossal £20bn order book, the City expects Babcock to punch earnings growth of 10% and 13% for the years to March 2016 and 2017 respectively, producing very cheap P/E ratios of 12.9 times and 11.5 times. Projected dividends of 26.1p and 29p per share for these years may create handy-if-unspectacular yields of 2.7% and 3%, but I expect payments to continue clicking higher along with earnings growth.

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Royston Wild 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.