With earnings up almost 75%, this FTSE 250 company looks like a stock to consider now

August’s V-shaped wobble within the inventory market has left some FTSE 250 shares languishing after I reckon they ‘ought to’ be motoring upwards.

One instance is defence-themed firm Babcock Worldwide (LSE: BAB). The shares haven’t made a lot progress regardless of the discharge of what seemed like a high quality set of outcomes on the finish of July.

If basic market circumstances had been higher, it’s doable the inventory may need risen extra in August. However the reality it hasn’t could also be a possibility for traders to analysis and contemplate the enterprise now.

The corporate reported “sturdy” progress for the 12 months to 31 March 2024. Working revenue and free money circulate had been each a lot increased than the prior yr. In the meantime, underlying fundamental earnings per share shot up by virtually 75%.

Chief govt David Lockwood stated the agency made good strategic progress in the course of the yr and money circulate was “forward of expectations“.

Buying and selling effectively

That’s what traders like to listen to: a enterprise that’s outperforming its administrators’ personal assumptions.

Nonetheless, it’s simple to change into over-cautious and angst-filled, resulting in concern that such sturdy buying and selling can’t probably proceed!

After all, it could not. However equally, it might. Reversion to the imply isn’t all the time an instantaneous impact! The entire sector seems strong proper now and that present is more likely to be serving to Babcock alongside.

Lockwood stated the enterprise is “effectively positioned” to learn from the “the sustained uplift” in world defence budgets. Many international locations must re-equip and modernise their militaries and that scenario opens up ongoing alternatives for the agency.

Babcock gives companies and merchandise within the defence, aerospace and safety sectors. Lockwood reckons the agency combines engineering know-how, buyer intimacy and operational asset information. All that helps to drive collaborative relationships and product growth functionality.

It’s a set-up that’s “more and more enticing” to clients, Lockwood stated, and the administrators are assured about assembly the agency’s medium-term targets.

Robust earnings forecast forward

Metropolis analysts anticipate a bumper yr for normalised earnings within the present buying and selling yr to March 2025 — suppose a rise of simply over 50%. There’s additionally more likely to be a double-digit share advance the next yr.

Nonetheless, one of many dangers going through a enterprise like Babcock is that it could mess up on a number of of its fixed-price contracts. If the unique price estimates show to be incorrect, revenue margins can disappear and the corporate could miss its earnings expectations.

On prime of that, most of the agency’s giant clients are nationwide governments. So a change in coverage sooner or later could deplete Babcock’s order e book.

Nonetheless, with the share worth close to 530p, the forward-looking price-to-earnings a number of for subsequent yr is slightly below 11.

I don’t consider that valuation seems extreme, so can be eager to dig in with additional analysis now with a view to contemplating the inventory for inclusion in a diversified portfolio.