LONDON -- When Babcock International Group (LSE: BAB ) published its full-year results last week, management wasn't shy. "Excellent financial results deliver further strong progress-well positioned to realize future opportunities," it yelled, right at the top of its release. Is management right to be so bullish? Should I buy this stock?
A 6% rise in underlying revenue to £3.24 billion and a 14% leap in operating profits to nearly £377 million are certainly worth shouting about. Underlying profit before tax and basic earnings per share (EPS) both rose a whopping 16%. Net debt was cut from £641 million to £550 million, bolstering Babcock's financial base. Better still, its bid pipeline hit £15.5 billion, up from £9.5 billion last year. No wonder management was in full cry. Shareholders also have plenty to cheer, with the total dividend up 16% to 26.3 pence per share.
Bids don't necessarily mean business, Babcock still has to win those formal competitive processes. But with just 12% of these rebids, it is gunning for new business rather than battling to keep existing clients. Its order book did dip slightly, from £13 billion to £12 billion. In a rare subdued moment, management described this as "stable".
Defense is a worry, with government spending under pressure in the U.K. and beyond, but that could work in Babcock's favor. The Ministry of Defense is keen to save money by outsourcing, as are other U.K. central and local government departments. Babcock is also building its international presence, notably in Australia, Canada and the Middle East. Its exposure to the nuclear, aerospace, mining, education, rail and energy industries provides further diversification.
There are other challenges. Babcock relies on winning major contracts with central and local government, and major companies. Losing a client could knock investor confidence. Bidding is an expensive business, especially if you lose. Its contracts also carry strict performance conditions, with penalties for failure.
10 years of growth
Babcock's share price has performed strongly, rising 38% in the last 12 months and 106% over three years, against 28% and 34% respectively for the FTSE 100 as a whole. It is a little pricey as a result, trading at 16.1 times earnings. It yields a so-so 2.3% against the FTSE 100 average of 3.4%, although healthy 2.7 cover gives room for more double-digit dividend hikes in future. Forecast EPS suggests a 2% drop over the next 12 months, which worries me, although it should recover to 9% in the year to March 31, 2015. But after 10 years of consecutive growth, Babcock still looks a tempting buy.
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