Director dealings of FTSE 250 stocks can give some extra insight into what management thinks of its business. When insiders start buying, it’s usually a strong indicator that they’re confident about long-term performance. But when they start selling, then it could suggest something’s going wrong.
So I was intrigued to see Babcock International (LSE:BAB) CFO David Mellors selling around £1.4m worth of shares at the start of September. And he wasn’t the only one. Just a week before, CEO David Lockwood sold almost £2.1m worth of shares!
Needless to say, seeing the top two executives in a company sell enormous blocks of shares is worrying. Do they know something we don’t? And should investors follow in their footsteps?
What’s going on at Babcock?
2024’s been a relatively good year for Babcock shareholders. The defence enterprise has seen its share price rise by more than 15% since January, even after suffering a bit of a tumble on its latest results.
Like-for-like revenue’s moving up by double-digits. And thanks to considerable margin expansion, underlying operating earnings jumped from £177.9m to £237.8m between March 2023 and March 2024. Pairing this with a £10.3bn contracted backlog, the company’s hardly short on customer orders, nor is that likely to change given the rise in geopolitical conflicts around the world.
But the earnings weren’t perfect. Trouble continues with its contract to build frigates for the Ministry of Defence. The sudden rise of raw material, labour and energy costs, among other overhead expenses, has caused this contract to go way over budget. And since the pricing’s fixed, the group’s suffered a £100m loss on the deal in its 2023 fiscal year. Now, another £90m’s just evaporated.
Despite this expensive hiccup, Babcock’s financial position’s still moving in the right direction. A surge in free cash flow has enabled management to continue tackling the firm’s pension deficit, and net debt’s fallen drastically over the last four years.
Obviously, that’s all rather positive. So why are the CEO and CFO selling millions of pounds worth of shares?
Inspecting the director trades
Looking at the regulatory filings, both Mellors and Lockwood don’t appear to be jumping ship. Both directors recently received their annual compensation packages, which included awards of 586,808 and 838,292 shares respectively. And roughly half of these awards were sold off to convert them into cash.
Overall, both directors have actually increased their net stake in Babcock, further aligning their interests with shareholders, which is an encouraging sign.
So should investors consider selling? If I were a shareholder in this FTSE 250 enterprise, these director deals wouldn’t be enough evidence for me to start clipping my position. Instead, I’d look for other warning signs that might indicate operational problems. For example, if the balance sheet deleveraging, pension deficit, or order fulfilment suddenly start moving in the wrong direction.
The post A director just sold £1.4m of shares in this FTSE 250 company! appeared first on The Motley Fool UK.
Should you buy Babcock shares today?
Before you decide, please take a moment to review this first.
Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.
It’s called ‘5 Stocks for Trying to Build Wealth After 50’.
And it’s yours, free.
Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.
And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.
That’s why now could be an ideal time to secure this valuable investment research.
Mark’s ‘Foolish’ analysts have scoured the markets low and high.
This special report reveals 5 of his favourite long-term ‘Buys’.
Please, don’t make any big decisions before seeing them.
Claim your free copy now
More reading
2 FTSE 250 shares and an ETF I think could deliver spectacular long-term wealth!
Hunting for value stocks? Here’s 1 firmly on my radar!
Best British value stocks to consider buying in September
Up 151%! Should I buy this FTSE 250 stock that just reinstated its dividend?
3 of my favourite FTSE 250 bargain shares for September!
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
