Positives outweigh negatives31 Dec 2018 13:52
I have bought back in today having followed from the sidelines for last 6 month's. Previously lost alot on this share and cut my losses earlier this year, but the following reasons have made me buy in again:
* my estimate of 'Intrinsic Value' based on the company's future Cash Flow p/share is £10.51, I have used aggregate of all analysts estimates who cover the stock and extrapolated to 5 years;
* current P/E well below historical average for the company and for the sector. I expect some reversion to the mean in the medium term (6-18months);
* PEG of 0.6 tells me that the stock is very undervalued based on next year's expected growth in EPS, which should be c17% next year based on senior management outlook provided in most recent results;
* current market cap is below it's NET Tangible Book Value;
* although I'd prefer if debt was lower, the debt is well covered by operating cash flow, and Interest is well covered by EBIT (11x);
* Dividends are stable, have increased over the last 10 year's, and are well covered by Earnings. c6% Dividend Yield;
* very high institutional ownership;
* I count 9 different Director BUYS in the last 12 month's, no SELLS;
* Share price has fallen c60% in the last 5 year's despite the fact revenues and profits have increased over that period.
In my opinion, the main thing that's affecting the share price is SENTIMENT, NOT FUNDAMENTALS. The risk of a Labour government, which could mean mass nationalisation, is being aggresively priced into the stock over the last 12 month's. Babcock is the 13th most shorted stock in the UK with >7% of shares in issue being shorted at the last count. This is alarming and uncomfortable for me as a shareholder, but those shares will have to be bought back at some point which would result in a sharp bounce. The shorter I'm sure are banking on more political turmoil in the UK which is why many of them have increased their positions slightly in recent months.
All things considered, I believe that the positives outweigh the negatives which is why I am comfortable buying back in at this low price. My experience has taught me that FUNDAMENTALS usually come out on top and negative SENTIMENT in a good company can only last for so long. It's only if the FUNDAMENTALS change that I will consider selling. I will look at any further weakness as a buying opportunity. GLA
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