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I’m searching for FTSE 100 shares that could be about to take off this month. And I think I’ve identified a blue-chip potential boomer — global defence giant Babcock International (LSE:BAB).
I want to start by saying that predicting short-term price movements is a challenging business. A range of company, industry and economic factors can mix to unexpectedly drive a stock sharply lower. Yet there are strong reasons to believe this UK share could still take off.
City analysts think so. They expect Babcock shares to soar 29% over the next 12 months, according to their average price forecast. I think they could take a big step higher as soon as 19 November.
Want to know why?
A cheap FTSE share
Are Babcock International shares too cheap right now? It’s one of the UK’s best value defence stocks based on expected earnings. I feel a strong half-year update on the 19 November could prompt a sharp re-rating of its shares.
Soaring defence spending since 2022 has boosted industry giants like Babcock. But more recently, fears over soaring inflation and its impact on supply chains and costs has smacked share prices. This particular FTSE 100 operator is down 20% this year.
The question is, are these dangers now baked into Babcock’s share price? I think a strong case can be made as its forward price-to-earnings (P/E) ratio of 16 among the sector’s lowest. BAE Systems‘ is far higher (26.7); so is that of Rolls-Royce (28.9).
That’s not the only eye-catching thing right now. At 0.3, Babcock’s price-to-earnings growth (PEG) ratio sits well inside value territory of 2 and below.
Upgrades on the cards?
Babcock’s rock-bottom P/E might limit losses if confidence in the defence sector rises again. As I’ve also said, it might leave scope for significant gains if latest trading news this month demonstrates further progress following September’s AGM.
Back then, Babcock — whose services include building and maintaining the Royal Navy’s fleet — announced “robust” demand in its core defence markets. Major order wins include a CAD$1.2bn submarine support programme with Canada.
But that’s not all, with the FTSE share also announcing “continued strong performance” in its Nuclear division, another key category. This strength across the board meant Babcock maintained its guidance for the full year and beyond despite growing cost-related threats.
Yet here’s the thing. Babcock has a habit of being ultra cautious with regards to its forecasts. Given its strong operational performance and supportive market conditions, an upgrade to profit estimates could well be around the corner.
Analysts at RBC Capital also say they “see upside to Babcock’s mid-term guidance for mid-single-digit organic growth and an adjusted EBIT margin [above 9%].” Might a share-price-boosting upgrade come as soon as this month’s trading update?
A top growth opportunity?
It’s possible, in my view. Yet as I said above, guessing near-term share price movements is tough for any stock. With Babcock, the share price might actually fall if UK bond yields hit fresh multi-year highs in November, raising worries over future defence spending. Other dangers include signs of accelerating costs as inflation rises.
On balance, though, I think Babcock’s shares are worth serious consideration this month. And especially at current prices. If you’re looking for top growth stocks, I also suggest looking at the FTSE 100 share in the free wealth report below.
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Royston Wild owns shares in Babcock International.
This story originally appeared on Motley Fool
