In April, I named Babcock International Group (LSE: BAB) as a bargain stock that was ripe for a rebound after three years of unremitting share price decline. The stock is down another 10% since then, but I haven't changed my view. FTSE-100 listed Babcock still has bags of potential yet is 10% cheaper than it was then, and I reckon this makes it an even better bargain.
The £4.48bn engineering support and outsourcing specialist has served up plenty of good news lately. In May, its full-year results showcased a 9.7% rise in pre-tax profit to £362.1m, with basic earnings per share (EPS) up 8.4% to 61.8p. Babcock cut net debt from £1.23bn to £1.17bn and lifted its full-year dividend 9.1% to 28.15p. It also secured new business from the French Ministry of Defence and an American nuclear submarine programme, the first non-US company to do so.
In May, it won a £500m contract to provide ambulance services across Norway for 11 years. It has also renewed two helicopter emergency medical services contracts in Queensland, Australia, and has new work from both the Royal Navy and US Navy. Just last week it reported a good start to the new financial year, with 82% of revenues already booked. Its order book remains stable at around £19bn with another £10.5bn in the bid pipeline.
Despite all this, Babcock stock trades at just 10.5 times earnings. The forecast yield is 3.5%, nicely covered 2.8 times. EPS growth is expected to slow to just 3% in 2018, but speed up to 9% in 2019. The big concern is of course Brexit, which finally appears to be doing serious damage to the UK economy. However, as it continues to pay down debt, Babcock looks to have great turnaround potential.
Electronics retail group Dixons Carphone(LSE: DC) has had an even worse time of it lately, its share price down 22% in three months and 44% over two years. Again, Brexit is partly to blame, as consumer sentiment and retail spending gets squeezed.
The FTSE 250-listed group, which includes the Currys, PC World and Carphone Warehouse brands, was hit by a downgrade last week, with Exane BNP Paribas warning of threats to the company's mobile phone market position as networks and manufacturers such as BT and Sky look to sell direct to customers.
However, I feel that Dixons Carphone's critics are ignoring the hard work the group has done to make itself stronger and more resilient. June's preliminary full-year results showed group like-for-like revenue up 4%, with statutory revenue rising 9%. Headline profit before tax rose 10% to £501m, and although free cash flows fell from £202m to £160m, net debt was "broadly flat" at £271m.
Nordic but nice
Management also hiked the full-year dividend 15% to 11.25p, and the stock is currently on a generous forecast yield of 4.6%. Dixons is offsetting Brexit fears with rapid growth in the Nordics and southern Europe, while the current valuation of just 7.4 times earnings is tempting. However, forecast EPS growth is just 1% in 2018 and 4% in 2019, and Babcock looks the stronger of the two.
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Harvey Jones has no position in any 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.