Babcock International: A War Room Winner in Defense and Nuclear's New Era

Babcock International Group PLC (LON: BAB) is a stock that's doing what every investor dreams of: thriving in two of the hottest sectors on the planet—defense and nuclear energy. With profit growth hitting 51% in fiscal 2025 and a record £10.4 billion order backlog, this UK-based engineering giant isn't just a beneficiary of global security and energy transitions—it's a leader. Let's unpack why this stock is primed to fire higher.

The Financials Are Firing on All Cylinders

Babcock's FY2025 results are a masterclass in execution. Statutory operating profit surged 51% to £364 million, while revenue climbed 11% to £4.83 billion. The company's underlying operating margin is now targeting 9% or higher—a bold upgrade from its previous 8% goal—thanks to cost discipline and scale. The crown jewel? Its contract backlog of £10.4 billion, fueled by major wins like a five-year DSG contract extension for the British Army and France's £1.2 billion Mentor 2 pilot training deal.

The cash is flowing too. Underlying free cash flow hit £153.4 million, and the company just announced its first-ever £200 million share buyback for 2026, alongside a 36% dividend hike (total annual dividend up 30% to 6.5 pence/share). This isn't a company clinging to cash—it's rewarding shareholders while aggressively reinvesting in growth.

Defense Spending Surge: A Tailwind That's Blowing Strong

Babcock's defense division is in the sweet spot of a global spending boom. According to the Stockholm International Peace Research Institute (SIPRI), global military spending hit $2.7 trillion in 2024, a 9.4% leap. Europe's outlay surged 17% to $693 billion as nations like Germany (up 28%) and Poland (up 31%) bulk up after the Ukraine war. In the U.S., defense spending rose 5.7% to $997 billion, with nuclear modernization a priority.

Babcock's Marine division, which builds and maintains naval vessels, is cashing in. The Type 31 Frigates program—where Babcock hit milestones like the HMS Venturer's water entry—secured £240 million in new contracts. Meanwhile, its joint venture with U.S. giant Huntington Ingalls in Australia is locking in long-term work. With NATO members now 18 out of 32 hitting the 2% GDP defense spending target, this isn't a short-term blip—it's a decade-long trend.

Nuclear Power's New Era: Babcock's Ace in the Hole

While defense is red-hot, Babcock's Nuclear division is positioned for exponential growth. Global uranium demand is set to soar as 31 countries pledged at COP29 to triple nuclear capacity by 2050, with China alone targeting 200 GW by 2035.

Babcock's Cavendish Nuclear subsidiary is already cashing in, posting 28% revenue growth on civil projects like Hinkley Point C. The company's Submarine Availability Support Hub and Babcock Immersive Training Experience (BITE)—which trains engineers in VR—are game-changers.

The MIT Energy Initiative warns that excluding nuclear would double decarbonization costs—and Babcock is the one building the reactors, training the workers, and maintaining the infrastructure.

The Bear Case? Leverage? Not a Problem Here

Critics might point to Babcock's £101.2 million net debt, but the numbers tell a story of strength. Gearing is 0.3x—a fraction of peers' levels—and free cash flow is now 80% of profits (up from 70%). With £10.4 billion of backlog secured, this isn't a debt-fueled gamble—it's a cash-generating machine.

Investment Thesis: This Stock is Built for the Long Game

Babcock is a rare breed: a company with two secular tailwinds (defense and nuclear) and a proven ability to convert contracts into cash. The buyback and dividend hikes aren't just shareholder-friendly—they're signals of confidence.

Buy the dips here. The stock is up 12% post-results but still reasonable at 18x forward P/E. With margins expanding, backlog growing, and geopolitical winds at its back, this isn't a trade—it's a stake in two of the 21st century's most critical industries.

Final Take: For investors who want to bet on a world that's safer and less carbon-heavy, Babcock International is a no-brainer. Strap in—this stock is just getting started.