Shots Fired

Babcock's lost at sea with disappointing forecast

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What's going on?

British defense contractor Babcock saw its shares slide 5% on Wednesday after reporting a drop in profit in the last six months and a forecast that sent investors scurrying for cover.

What does this mean?

Babcock, whose biggest customer is the UK’s Ministry of Defence, said its profit bombed 64% versus a year earlier. That was largely due to a one-off charge arising from internal restructuring and the closure of a shipyard. But it was the choppy waters ahead that really made investors queasy. Babcock’s big project to dismantle Britain’s old nuclear reactors comes to an end next year, which will lead to a much bigger-than-expected drop in revenue.

Making matters worse, the Ministry of Defence is reportedly concerned about Babcock’s overhaul of the UK’s flagship nuclear submarine. Amid increasing uncertainty in the outsourcing sector (rival Carillion collapsed at the start of 2018), that’s another warning shot for Babcock’s investors.

Why should I care?

For markets: Beware the shorts.

Babcock’s struggles have been exacerbated by the mysterious “Boatman Capital”, an anonymous group that published a report this month criticising Babcock’s financial performance. It’s suspected that the group are short-sellers: investors betting on the price of Babcock’s stock sinking. They do this by selling borrowed shares and waiting for their price to fall, before rebuying and returning the shares after pocketing the difference in the two prices. It’s in short-sellers’ interests to spread negative news that will devalue a stock – something Tesla’s CEO has accused traders of doing to his company too. All’s fair in love and war…

The bigger picture: No to nuclear.

Babcock makes a lot of money from the nuclear industry. But since the 2011 Fukushima disaster, countries like Germany have started to phase out their nuclear reactors, and global nuclear production could fall worldwide in the coming decades. There’s money to be made from decommissioning old reactors, but the half-life won’t last forever. Babcock might need to start testing new waters.

Originally posted as part of the Finimize daily email.

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