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Babcock International (BAB)
After a painful reset in 2021, the defensive specialist is now operating in a strong position. Michael Fahey writes.
After taking the helm of Babcock at the end of 2020, David Lockwood pledged to raise £400m through disposals within 12 months.
By the time it reported its 2022 figures, Babcock had exceeded this target and was able to pay down debt, cover pension shortfalls and fund improvements to its Devonport shipyard. However, when its 2023 full-year results were published in July, it reported a further £100m hit on long-term contracts with the Ministry of Defense.
The company also lost money on other contracts, with management saying 11% of its revenue last year was related to “low- or no-margin” work.
Retiring these legacy contracts will take time. These contracts will not begin to be significantly phased out until 2026, which will last him until 2028. However, as they become obsolete, companies execute projects more efficiently, bidding only on jobs that meet risk and margin thresholds. , Babcock is confident that it can sustainably maintain an operating profit margin of over 8%.
Babcock’s improved performance and decision to reintroduce a dividend for the first time in four years are behind the stock’s 35% rise over the past year. Investor sentiment is clearly improving.
However, Babcock’s stock price is less than 10 times expected earnings, making Babcock’s valuation multiple one-third lower than its domestic peers Kemling and BAE Systems.
Once debt is paid down, management has more options to increase profits, whether through capital investment for growth, bolt-on M&A, or simply returning excess cash to shareholders. As a result, the company has reasonably priced growth prospects and its balance sheet is free of the battle scars of 2020 and 2021.
NVIDIA (US:NVDA)
Given this AI semiconductor company’s growth prospects, its valuation isn’t as high as it seems. Arthur Sanz writes.
After a year in which the stock price of the main beneficiary of the artificial intelligence (AI) race more than tripled, many investors will be concerned that they have missed the boat with chip designer Nvidia.
However, when it comes to stocks, what goes up does not necessarily come down. Especially when the companies in question are enabling technologies that have the potential to destroy the world, as the steam engine, electricity, and the Internet once did.
The stock’s valuation seems extreme given its 64x trailing earnings. But considering Nvidia’s current momentum, things seem much more reasonable. In the three months to October, sales rose 206% from a year earlier to $18.1 billion. Operating margins at his Nvidia, a low-capital semiconductor design company that outsources manufacturing, rose significantly to his 57%, and operating income rose 1,259% year-over-year to his $10.4 billion.
Such rapid growth has led some fund managers to base their arguments on the value of the stock. “NVIDIA’s stock price rise has been driven by revenue growth, not valuation expansion,” argues Tony Wang, his manager at T Rowe Price’s U.S. Technology Strategy Co-Portfolio. “Even at a forward P/E ratio of 25 times, it still looks quite affordable.”
Demand for Nvidia’s hardware will accelerate in 2024, and the company’s future earnings multiples may soon look like a bargain.
MJ Gleason (GLE)
Investors fail to understand the benefits of this developer’s market niche. Mitchell Labiak writes.
MJ Gleason is not your typical publicly traded home builder. The homes the company is building at The Pastures, a 120-home development in Billsthorpe, are selling at a new-build premium above the average house price in the area, with prices starting at £211,995 for a three-bed home. is still much cheaper than both UK countries. FTSE 350 housebuilder average.
This price range is key to the investment case. While major companies in the industry pursue profits by purchasing prime land in wealthy areas and developing expensive housing, MJ Gleason is pursuing profits in areas where major home builders have never set foot and where development costs are low. , purchasing brownfield and landfill sites at discounted prices. As a result, MJ Gleeson is often the only bidder for the sites it acquires in the Midlands and the North of England.
The company’s model also has one of the lowest operating margins in the industry, more than 10 percentage points lower than that of London-based developer Berkeley. But while Berkeley has halted development work citing overly burdensome regulations, MJ Gleason is moving ahead with development and increasing its future sales pipeline. If the mark of a solid investment in this space is avoiding violent boom-to-bust sales cycles, then MJ Gleason has an advantage over its better-known peers.
In fact, sensing the mood music, several major rivals are focusing on the affordable housing theme and building homes at lower price points. Meanwhile, MJ Gleason’s focus has remained stable over the years, and the fact that other companies are now following suit suggests the company’s niche is better suited to the current moment in the housing cycle. .
Investors are not aware of this. Not only does MJ Gleason’s stock trade at less than 11 times forward earnings, it also trades below its net asset value. This is an unfair discount for a company with a stable future, and analysts agree. Investec expects MJ Gleeson could potentially offer greater remuneration than his other FTSE 350 housemakers, assuming the share price revalues as expected.
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