With earnings up nearly 75%, this FTSE 250 company looks like a stock to consider now

August's V-shaped volatility in the stock market left some disappointed FTSE 250 stocks run out when I think they 'should' go higher.

One example is a company with a defense theme Babcock International (LSE: BAB). Stocks haven't made much progress despite the release of what looks to be a good set of results at the end of July.

If general market conditions had been better, the stock might have gone higher in August. But the fact that there has never been an opportunity for investors to research and consider the business now.

The company reported “strong” Progress for 12 months to 31 March 2024. Operating profit and free cash flow were both significantly higher than the previous year. During that time, basic earnings per share rose nearly 75%.

Chief executive David Lockwood said the company had made good progress during the year and cash flow “before what was expected“.

Good trade

That's what investors like to hear: a business that is outperforming its directors' forecasts.

However, it is easy to become overly cautious and full of resentment, leading to the fear that such strong trading cannot continue!

Of course, it may not be. But all the same, it was possible. Getting back to what you say is not always a quick result! The entire field is looking strong right now and it's possible that what's happening will help Babcock.

Lockwood said business “well placed” to benefit from “steady rise” in global defense budgets. Many countries need to re-equip and modernize their military and that situation opens up further opportunities for the company.

Babcock provides services and products in the defense, aerospace and security sectors. Lockwood considers the company to combine engineering knowledge, customer proximity and material expertise. All of that helps drive collaborative relationships and the ability to improve productivity.

That's a set-up “it's getting more and more attractive” to clients, Lockwood said, and directors are confident of meeting the firm's medium-term goals.

Strong salary forecast ahead

City analysts are expecting a bumper year for average earnings in the current trading year to March 2025 – expect a rise of just over 50%. There may also be a doubling of the percentage in the following year.

However, one of the risks facing a business like Babcock is that it may violate one or more of its fixed-price contracts. If the original cost estimates prove to be incorrect, profit margins can disappear and the company may fall short of its revenue expectations.

In addition, many of the company's largest customers are national governments. So a change in policy in the future could deplete Babcock's order book.

However, with the share price close to 530p, the forward earnings estimate for next year is less than 11.

I don't believe the valuation looks extreme, so I would be interested in getting into some research now with a view to considering the stock for inclusion in a diversified portfolio.