Investment Column: Take profits in Babcock International

McBride; Dunelm


Our view: Sell

Share price: 715.5p (+4p)

Worried about defence cuts? No problem. At least that's the message from Babcock International.

In fact, the group says that countries such as Britain and America, which are laden with vast amounts of public debt, are increasingly looking to drive efficiencies by outsourcing defence work to companies such as Babcock, which is perhaps best known for maintaining the Royal Navy's submarine fleet.

We've always been slightly sceptical about the outsourcing story. All too often its trotted out as a panacea when people, often in the public sector, need to save money. The results are not always happy.

All the same, Babcock's trading statement yesterday was an upbeat one. Its progress over the first quarter was described as good and consistent with expectations announced alongside the results in May. The group's markets were said to be "robust" with opportunities for growth overseas and even in the UK. The order book (£12bn at year-end) is strong, and the company continues to throw off cash while benefiting from synergies following the acquisition of rival VT. The latter's US defence operations are, however, set to be sold – no great surprise.

So all appears fine and dandy. The trouble is, the market has woken up to the story and even though the shares have eased over the past few days, they are still up by a quarter this year. We're very happy with our buy recommendation in January at 579p. But the question is, what now?

At current levels, the stock is valued at nearly 12 times full-year earnings, falling to 10.5 times next year. The group has historically traded at about 14 times, which suggests that there is room for a little growth. But times are tougher now. It's a tough call. However, on balance, in the short to medium term we don't see much to drive the stock forward. Take profits.

McBride

Our view: Sell

Share price: 131.75p (-8.25p)

The last time we looked at McBride, we decided to sell, reasoning that its stock was likely to be pressured by the combination of rising raw materials costs and the ongoing consumer squeeze, particularly in the UK.

Indeed, the maker of own-brand household cleaning and personal care goods flagged up the negative impact of these very factors at the time of its interim results. The following few months saw a spike in the share price, with investors driving it to well above 150p, making our call at just under 140p look somewhat hasty.

But then came another period of weakness, which, together with yesterday's decline, means that McBride is now trading at just under 132p. The question is whether now is the time to buy, and the answer, we believe, can be found it yesterday's trading statement.

There was nothing in the update to suggest that input prices had softened, nor was there much encouragement on the retail environment, which the group characterised as "weak". This is hardly surprising, giving activity on the commodity markets and increasing signs of turmoil on the high street. On the upside, the group did say that, when it came to raw material costs, its "initiatives to recover these increases are continuing, but where this is not possible in the current weak trading environment, we are exiting non-profitable business [sic]". It said it would provide a further update at the time of its full-year figures.

We look forward to that release, which may well prove to be a catalyst for gains. But until then, we think the backdrop remains far too uncertain.

Dunelm

Our view: Buy

Share price: 450.5p (+45p)

The retail environment, as we noted earlier, remains clouded; in fact, the cloud seems to be turning a shade darker every day, with news of company administrations or restructurings or another dip in the mood ofthe consumer.

But there are bright spots. Dunelm, the homewares retailer, cheered the markets yesterday by announcing an uptick in sales.

This is no mean feat, particularly in light of the turmoil elsewhere. Adding to the attraction is the fact that Dunelm boasts a strong balance sheet, ending its financial year with nearly £32m in cash.

We would just stop here and recommending buying into this highly cash-generative business that is bucking the gloom. But then there is the valuation, which, at under 14 times this year, hardly looks prohibitive. That figure falls to under 13 times on estimates for next year, underscoring the investment case, in our view.

News
people
Arts and Entertainment
Lena Dunham
booksLena Dunham's memoirs - written at the age of 28 - are honest to the point of making you squirm
Arts and Entertainment
A bit rich: Maggie Smith in Downton Abbey
tvDownton Abbey review: It's six months since we last caught up with the Crawley clan
Sport
Frank Lampard and his non-celebration
premier leagueManchester City vs Chelsea match report from the Etihad Stadium
PROMOTED VIDEO
Life and Style
A new app has been launched that enables people to have a cuddle from a stranger
techNew app offers 'PG alternative' to dating services like Tinder
News
Jacqueline Bisset has claimed that young women today are obsessed with being 'hot', rather than 'charming', 'romantic' or 'beautiful'
people
Arts and Entertainment
Jake Quickenden sings his heart out in his second audition
tvX Factor: How did the Jakes - and Charlie Martinez - fare?
Sport
premier league
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvOnly remaining original cast-member to leave crime series
Sport
Mario Balotelli celebrates his first Liverpool goal
premier leagueLiverpool striker expressed his opinion about the 5-3 thriller with Leicester - then this happened
News
ebooksAn unforgettable anthology of contemporary reportage
News
Britain's shadow chancellor Ed Balls (L) challenges reporter Rob Merrick for the ball during the Labour Party versus the media soccer match,
peopleReporter left bleeding after tackle from shadow Chancellor in annual political football match
Arts and Entertainment
Female fans want more explicit male sex in Game of Thrones, George R R Martin says
tvSpoiler warning: Star of George RR Martin's hit series says viewers have 'not seen the last' of him/her
News
i100
News
i100
Sport
Plenty to ponder: Amir Khan has had repeated problems with US immigration because of his Muslim faith and now American television may shun him
boxing
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world
Apple still coolest brand – despite U2 PR disaster

Apple still the coolest brand

Despite PR disaster of free U2 album
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments