Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

The Babcock share price has slumped 30% in five months. Time to buy?

Published 19/11/2018, 13:50
Updated 19/11/2018, 14:46
The Babcock share price has slumped 30% in five months. Time to buy?

The Babcock share price has slumped 30% in five months. Time to buy?

Engineering services business Babcock (LSE: BAB) has been in the news recently for all the wrong reasons. It all started at the end of October when an anonymous research outlet, Boatman Capital, issued a report on the company, claiming that it has been “burying bad news about its performance,” and the group’s management is “not up to the job.“

Babcock responded to these allegations in a press release, refuting the report’s “many false and malicious statements.” The Ministry of Defence (MoD), one of the group’s largest customers, also stepped in to reassure investors, issuing a statement declaring: “We monitor the health of all of our strategic suppliers, including Babcock, and remain committed to working with them on a wide range of programmes.” Last year, Babcock completed contracts worth £1.7bn for the MoD.

Unfortunately, over the past two weeks, further cracks have started to emerge in Babcock’s facade.

Further bad news? At the end of last week, it came to light that the MoD has given the company until the end of the year to show that it can complete the £200m overhaul of the UK’s nuclear submarine programme on time. A few days later, rumours began to circulate that the enterprise will announce an exceptional charge of around £100m against its helicopter business, acquired in 2014 for £1.6bn, which isn’t living up to expectations.

Today, management has responded to this rumour telling investors that “Babcock is currently undertaking a programme to strengthen the Group by exiting a number of small, low-margin businesses, including the Appledore shipyard, and is reshaping its oil and gas business.” The Appledore shipyard, which has not had any new orders for some time, was a weak spot mentioned in the initial Boatman report. Management doesn’t expect these adjustments to be material.

Too cheap to pass up? With speculation about the company’s health building, I think it’s no surprise that shares in Babcock have lost more than 30% of their value since June. And with the City expecting the company to produce earnings per share (EPS) of just under 85p for 2018, these declines have pushed the shares down to a forward P/E of just 6.9, which, at first glance, might appear too good to pass up for value investors. But I’m not so sure. It’s clear the business has some weak spots and, as of yet, we don’t know how deep the problems go. As we have seen with outsourcing companies Capita, Interserve, Serco, Carillion and G4S (CO:G4S), small issues can quickly spiral out of control in this industry, and shareholders are usually the ones left holding the bag.

The bottom line So overall, Boatman Capital’s report might be nothing more than hot air, but newsflow from the company since the report was released confirms that the business is struggling.

With this being the case, even though the stock looks cheap based on current analyst growth expectations, I’m not rushing to buy shares in Babcock today. Indeed, with so much uncertainty surrounding the business, I think it’s almost impossible to try and put a value on the underlying company. I’m happy to watch from the sidelines, for now.

Rupert Hargreaves owns no share 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.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.