Is Babcock International Group plc a FTSE 100 growth share that could make you a million?

Is now the right time to buy Babcock International Group plc (LON: BAB) while the FTSE 100 is close to an all-time high?

| 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.

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.

Buying stocks which have delivered a disappointing share price performance can be a highly profitable move for long-term investors. In many cases, there is a wide margin of safety on offer, while the upside potential may be higher than the downside risks.

With engineering support company Babcock (LSE: BAB) having fallen by 27% in the last year, it is clear that investor sentiment is weak. However, with a low valuation and positive earnings growth forecasts, could it be a FTSE 100 stock that helps to make you a million?

Positive news

The company released news of a contract win on Monday. It has been awarded a 10-year contract to supply Sellafield with specialist handling and containment systems to process nuclear material. The contract will be delivered by Babcock’s subsidiary, Cavendish Nuclear, and could be worth up to £95m over the first three years of its life. With the subsidiary having experience in working with Sellafield and the resources to deliver the project, it could have a positive impact on the company’s financial and share price performance.

As mentioned, Babcock has fallen significantly over the last year. Its shares now trade on a price-to-earnings (P/E) ratio of 8.6, which given the firm’s size and scale appears to be exceptionally low. It suggests that investors have priced-in a very challenging and disappointing future for the business.

Looking ahead though, the company is expected to record a rise in its bottom line of 3% in the current year, followed by further growth of 4% next year. Certainly, these figures are below those of the wider index, but they suggest that the firm is performing relatively well at an uncertain time for the wider industry. As such, now could be a good time to buy the stock for the long term.

Growth potential

Also offering an impressive growth rate is wealth manager Hargreaves Lansdown (LSE: HL). It is expected to post a rise in its bottom line of 11% in the current year, which comes after a period of relatively solid performance. For example, in the last five years the company has been able to deliver a rising bottom line 80% of the time, with its annualised earnings growth rate being over 13%.

The problem for investors though, is that the company’s valuation appears to adequately factor-in its growth outlook. Hargreaves Lansdown may have a dominant position within its industry, but it trades on a P/E ratio of 34.2. This suggests that it is overpriced and that if its growth rate disappoints versus forecasts, it could lead to severe falls in its share price.

Certainly, the company has a sound strategy as well as the potential for increasing profitability as the current Bull Run continues. But with the likes of FTSE 100-peer Babcock trading on lower valuations, there could be more attractive investment opportunities in other parts of the index.

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.

Peter Stephens owns shares in Babcock. The Motley Fool UK has recommended Hargreaves Lansdown. 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »