Time to back busy Babcock?

It seems the market has it in for Babcock. Shares in the engineering outsourcer are down 15% since March and recently traded at nine-month lows. But first-quarter figures look good and full-year results should match forecasts, suggesting the sell-off is overdone.

"Activity levels remain high and trading is in line with our expectations," says the company, which Investec Securities tips to make an adjusted pre-tax profit of almost £404 million in the year to March 2015 and earnings per share (EPS) of 68p, up 10% on last year. Consensus estimates are even more bullish.

And there's every reason to believe Babcock can do the numbers. Include the rights issue-funded acquisition of Avincis for £1.6 billion - tied up in May and currently going to plan - and the group order book currently sits at an impressive £13.5 billion. That covers almost three-quarters of forecast revenue for the current financial year, but excludes contracts at preferred bidder stage which will likely generate revenue during the second half. There'll be an extra £2 billion on the order book in the second half, too, as the Maritime Support Delivery Framework (MSDF) with the Ministry of Defence becomes operational.

The bid pipeline, meanwhile, at £16 billion includes about £3 billion of contracts at preferred bidder stage expected to transfer to the order book over the next few months. That's £1.5 billion down since March following unsuccessful bids for Tranche 2 of the Next Generation Estates contracts.

At 1,108p and following the recent de-rating, Babcock shares trade on just 16 times forward earnings, dropping to 14 times the year after. That's cheap by historic standards, especially as the City expects average EPS growth in double-digits over the next three years. Remember, too, that Babcock typically wins almost half the contracts it bids for.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.