When I see a stock jump more than 10% in a day, I know something important has happened regarding the company involved. Those kind of moves don’t just happen by chance. So when I saw that the Babcock International Group (LSE:BAB) share price was up 32%, it warranted a closer look. After review, I’m not looking to jump on the bandwagon and will explain why.
Why has the Babcock share price jumped?
The cause of the jump was a business update released earlier today. In it, the firm frankly outlined the current state of the company. The key points were:
- An accounting review has identified the need for impairments and charges of approximately £1.7bn.
- Babcock is changing its operating model to simplify the business and reduce layers. This will have a one-off cash cost of £40m and mean around 1,000 job cuts.
- Underlying operating profit is expected to be reduced by approximately £30m each year, as part of the accounting review.
It’s clear this is the start of a large transformation for the company that could last a long time. And the rally in the Babcock share price shows that investors saw this as a positive.
For example, the selling and divesting of businesses within the group is expected to yield around £400m over the next year. Not only is this a cash flow boost, but it also means the company will be slimmer and more efficient.
The accounting review is another element behind the jump in the Babcock share price. The hit is going to sting, but at least now the accounts are going to be in good order from now. Any nasty surprises should have been spotted in this review, so going forward the accounts shouldn’t have as many issues.
Why I’m still staying away
Despite the jump in the Babcock share price, I’m not going to be investing any time soon. If I zoom out from the performance of today, it’s clear Babcock is a struggling company (hence the need for a transformation).
Over a 12-month period, the share price is down almost 40%, and over three years, it’s down 65%. The long-term downtrend has been caused (in my opinion) by being too diversified. Divisions in Babcock range from nuclear to marine, aviation to land. This is to such an extent that the business struggles to really specialise in all of them.
Added to this is the fact that the company does a lot of business with the public sector. A good friend of mine who works with the public sector a lot is always complaining about the inefficiency and wasted money in the interaction between private and public sectors. Although I can’t pin this statement down firmly as a reason for the struggles of Babcock in recent years, it wouldn’t surprise me if this turned out to be a contributing factor.
I could be wrong on the business, and the share price could continue to rally as investors believe this is the start of something great. But personally, I’m not wanting to get involved.
jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.