2 bargain turnaround stocks with growth potential

Everybody loves a bargain, and everybody loves a good turnaround story as well. Could the following two stocks offer both?

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Babcock International Group(LSE: BAB) has had a disappointing three years, its shares down more than 27%. It is slumping again, falling 15% in the last six months, while most of the FTSE 100 went on a spree. The £4.48bn engineering support and outsourcing specialist is operating in a tough sector right now. Rival Capita was the worst performing stock on the FTSE 100 last year, its share price halving in value, and rivals Serco and Mitie also struggled.

The UK outsourcing sector has worried analysts ever since the EU referendum, as Brexit uncertainty dogs the domestic economy. However, Babcock has posted a string of new contract wins, and was recently named as the preferred bidder to support Royal Navy carriers as part of a Ministry of Defence programme worth about £360m over seven years. It also secured a seven-year, £70m MoD contract for six maritime equipment consumables packages. Other wins include a new EUR500m contract from the French Air Force, the manufacture of 22 missile launch tube assemblies for the Trident replacement programme.

Tactical nuclear raid

Babcock lost roughly £800m from its order book after agreeing to close its Magnox nuclear decommissioning contract two years early. Company boss Archie Bethel and chairman Mike Turner took nifty advantage of the subsequent dip to buy extra shares, so should you also snap up the opportunity?

It's steady as she goes with a future order book and strong pipeline of £30.8bn. Trading at a forecast 10.3 times earnings Babcock doesn't look expensive. Forecast earnings per share (EPS) growth of 6%, 7% and 8% over the three years to 31 March 2019 also encourage. By then, the yield should have risen to 3.6%, with a well-covered dividend. Short-term Brexit pressures look set to continue but this still looks like a long-term buy-and-hold to me.

Tune in, turn on, invest

There are signs that investors are switching back to broadcaster ITV(LSE: ITV), with the share price up 16% in the last six months after a torrid couple of years. The £8.55bn business made compulsive viewing several years ago, as chief executive Adam Crozier built up ITV Studios into an overseas revenue machine, greatly reducing dependence on UK advertising revenues. Net advertising revenue fell 3% to £1.67bn in 2016 offset by an 11% rise in non-advertising revenue to £1.855bn.

However, ITV still cannot escape Brexit fears, as economy worries trouble advertisers and customers alike. I am also concerned by the challenge from on-demand services such as Netflix (Riverdale has my kids hooked), as well as Amazon, and digital rival Sky.

However, ITV remains strongly cash generative and investors are reaping the rewards, with a 20% increase in the full-year dividend to 7.2p, plus a special dividend of 5p per share on top, worth around £200m. The City is forecasting a 5% drop in EPS this year before 4% growth in 2018, when the yield should hit a compelling 4.4%. The glory days of double-digit EPS growth seen in 2013, 2014 and 2015 may be over, but ITV is still one to watch.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended ITV. 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.