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I’d invest £2k in these 2 fast-growing FTSE 250 stocks in an ISA today

Harvey Jones — Wed, 22 Jan 2020 11:36:06 +0000

WH Smith Group (LSE: SMWH) has been a high street and train station fixture for years, selling a familiar assortment of books, stationery, magazines, newspapers, confectionery, gifts and toys. Yet from an investment point of view, the excitement lies elsewhere.

This stock is flying

The group’s growing global travel retail business has driven the WH Smith share price higher and higher. It is up almost 20% in the last six months, and by 87% over five years.

The FTSE 250 stock has dipped slightly today, down 2.76% at time of writing, following publication of its trading update for the 20-week period to 18 January, but this might even be a buying opportunity.

While total revenue rose a healthy 7%, like-for-like sales fell 1%. The high street operation was the culprit, with revenue down 5% over the period. Management is responding by identifying £3m of additional cost savings, bringing total cost savings for the year to £12m.

In sharp contrast, travel business revenues jumped 19%, boosted by its Marshall Retail Group acquisition, and further significant contract wins in the US. Its UK travel business also did well, “with strong sales per passenger driven by our initiatives and ongoing investment.”

A growing global operation

WH Smith completed the acquisition of “leading and fast growing US travel retailer” MRG, ahead of plan on 20 December and is pursuing further growth opportunities in the US and beyond. It has recently won a tender at Berlin Brandenburg Airport to open three units, while lining up a flagship pharmacy at Heathrow Terminal 2 for the summer.

The £2.4bn group looks a little pricey, trading at 21.4 times earnings, but you pay a premium for success. Recent steady earnings growth looks set to continue, with a forecast 5% this year and 9% in 2021. So now could be a good time to hop on board this expanding global business.

I like this FTSE 250 stock even more

Here’s another FTSE 250 stock that’s really flying, defence-focused engineering contractor Babcock International Group (LSE: BAB). It’s moved into recovery mode after a rough five years when the share price collapsed more than a third, from 1143p to 428p, which has left it looking like a real bargain.

I examined the Babcock share price in November and concluded it was too cheap to ignore, even though it was under a shorting attack from a mysterious group called Boatman Capital Research at the time.

I labelled it a high-yield bargain that you should buy before its share price recovers sharply. Consequently, it’s up 13% since then, helped by subsequent news it had won a £1bn contract to design and build the weapons handling system for Australia’s new Attack class submarines.

The £3.1bn group still looks dirt cheap, trading at just 8.6 times forward earnings, with a generous forecast yield of 4.4%, covered 2.6 times. Earnings are forecast to drop 15% this year, but start growing steadily thereafter. I said buy it in November, and I still reckon it’s a buy today.

The post I’d invest £2k in these 2 fast-growing FTSE 250 stocks in an ISA today appeared first on The Twelfth Magpie.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended WH Smith. 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.

I’d buy these 2 high-yielding FTSE 250 bargains before their share prices recover sharply

Harvey Jones — Wed, 20 Nov 2019 15:48:46 +0000

Defence-focused engineering contractor Babcock International Group (LSE: BAB) is yet another Neil Woodford pick that has disappointed, falling by more than half over the last five years, although there have been signs of a recovery lately.

Time to step up

The share price is up 16% over the past three months but stalled today, after its interim results revealed a drop in underlying profit before tax from £245.5m to £202.5m, while statutory revenue fell from £2.25bn to £2.19bn.

First-half results were nonetheless in line with expectations, with underlying revenue flat at £2.46bn, after allowing for the impact of “step downs”, resulting from big projects like the aircraft carriers coming to an end.

Chief executive Archie Bethel said performance was good across most of the group, with its “strong” Marine division offsetting some weakness in Aviation. The £2.75bn FTSE 250 group has increased its order book to a record £18bn, due to significant recent wins, including building the Type 31 warship for the UK’s Royal Navy and providing training to London’s Metropolitan Police Service.

Foreign fields

Babcock continues to expand internationally, including new Aviation operations in Norway and Canada, and amphibious assault ships for the Australian Navy. Its pipeline of opportunities has increased to £16bn as a result of increased bidding activity across all its markets, taking the total to £34bn, its highest ever.

Babcock now expects underlying revenue of around £4.9bn and underlying operating profit of between £540m and £560m. Despite today’s underwhelming market reaction, I thought the Babcock share price looked like a buy even before I realised it was trading at just 7.3 times forecast earnings, with a price-to revenue ratio of just 0.6.

Even better, the forecast yield is 5%, with cover of 2.7. A return on capital employed of 20% looks pretty solid as well.

Babcock has been subject to a shorting attack by a mysterious group called Boatman Capital Research, and today’s results show growth is slow, but I still find it highly tempting at the current low valuation.

Direct action

Here’s another embattled FTSE 250 stock, Direct Line Insurance Group (LSE: DLG), its share price having fallen almost 20% over the last year.

Motor and home insurance are tough sectors these days, as comparison sites turn them into commodity products sold largely on price, while squeezing the recurring income insurers have traditionally generated from auto-renewing customers. Direct Line refuses to appear on comparison sites, which makes it heavily reliant on its brand name to drive business.

The £3.78bn group now trades at a bargain valuation of 9.9 times forward earnings, but be warned, City analysts calculate those earnings will fall 17% this year, and 3% next. That may be reflected in today’s low price, but falling revenues are always a concern.

Bouncing back

Direct Line still lifted its interim dividend by 2.9% in July, and the forecast yield is now a whopping 10.1%. It is only covered once by earnings, and may be cut next year, but that would still leave the stock fulfilling its traditional role of offering a generous level of income.

Both FTSE 250 companies have had a bumpy time and I cannot promise it will be smooth roads from here, but I also suspect both have been oversold. The trick is to buy them before they recover, rather than afterwards.

The post I’d buy these 2 high-yielding FTSE 250 bargains before their share prices recover sharply appeared first on The Twelfth Magpie.

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Harvey Jones 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.

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

Rupert Hargreaves — Mon, 19 Nov 2018 13:50:48 +0000

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, 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.

The post The Babcock share price has slumped 30% in five months. Time to buy? appeared first on The Twelfth Magpie.

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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.