Babcock International (LSE:BAB) has become the worst-performing FTSE 100 stock on Monday (22 June). Down 7%, it’s slumped in value after its latest trading statement spooked investors.
The thing is, results for the 12 months to March were largely what Babcock flagged last month. Revenues grew 8% organically to £5.2bn, while underlying operating profit tanked 19% to £293.3m.
Profits fell after Babcock took a £140m charge on a contract to build five Type 31 frigates for the Royal Navy. The FTSE 100 firm said that
although the contract contained certain escalation clauses, it provided limited protection from the macroeconomic changes of recent years relating to Brexit, Covid, raw material prices, and UK labour shortages, which have significantly increased our costs.
Without this charge, Babcock’s underlying profits would have risen 19% last year, to £433m. Underlying operating margin would also have been higher at 8.2%, up from 7.5% in fiscal 2025 and exceeding the company’s 8% target. As it stands, the Type 31 disruption pulled margins down to 5.7%.
What about looking ahead?
There were no red flags on future guidance that may have frightened investors, either. Babcock International’s contract backlog was £9.8bn as of March, down from £10.4bn at the same point in 2025. But that was £200m higher than what it announced in May.
The company also said guidance for financial 2027 was unchanged, and that around 70% of expected revenues under contract as of 1 April, also as previously advised.
Finally, Babcock kept its forecasts beyond this year unaltered, stating that
we reaffirm our medium-term guidance of average mid-single digit organic revenue growth, underlying operating margin of at least 9% and average underlying operating cash conversion of at least 80%.
So what’s gone wrong today? For me, it seems investors remain concerned about execution risks and the possibility of additional cost overruns. As you can see, Babcock’s been stung badly by these problems in recent years.
The thing is…
However, project issues like these are a constant threat for any defence company. A combination of lengthy contracts, changing client requirements, and technical complexity sometimes lead to setbacks.
On the whole, Babcock International has a strong record of execution across all its divisions. The question is, then, has the market overreacted by sharply selling this FTSE 100 stock? I think a case can be made, especially when one considers how cheap Babcock shares are.
At 976.2p, the defence giant trades on a forward price-to-earnings (P/E) ratio of 16.5 times. To put that in context, the broader European sector average is roughly 27.
Furthermore, Babcock shares carry a price-to-earnings growth (PEG) ratio of 0.6. Conventional wisdom suggests any sub-1 reading implies a share trading below value.
So should investors consider buying this FTSE 100 stock today? I think so. Babcock’s share price is up 235% over the last five years. It may experience some fresh setbacks. But on balance, I expect it to continue climbing as European countries continue raising defence spending.
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Royston Wild does not hold any positions in the companies mentioned.
