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If President Trump makes good on his threat to impose tariffs on all imports to the United States, many UK stocks will be affected. His promise of “put america first” resonated with most voters. But it could mean problems for several companies on this side of the Atlantic.
However, there is one move that I think will work particularly well under Trump 2.0, regardless of whether he introduces import taxes aimed at the UK. This is due to his desire to have NATO members increase the proportion of their national income spent on defense.
Currently, all 32 members have committed to spending at least 2% of gross domestic product on military equipment and personnel. However, Trump wants them to go further.
On January 7 he said at a press conference: “I think NATO should be at 5%… Everyone can afford it, but they should be at 5%, not 2%.“
Given that the United States “only” spends 3.4%, this might seem a little unfair. However, what Trump clearly means is that he expects others to spend more so that the United States can spend less.
This means defense stocks with major US contracts could see a drop in revenue.
A possible beneficiary
However, a company like Babcock International Group (LSE:BAB) could prosper.
During the year ending March 31, 2024 (FY24), the group earned 70% of its revenue in the United Kingdom. It also generated another 6% from France and Canada, both NATO members.
The group's exposure to the United States is very small and comes mainly from the supply of components for its submarine fleet.
Encouragingly for the group, the UK government has launched a Strategic Defense Review and has promised “sets the path to spend 2.5% of GDP on defense”.
Although this is well below Trump's 5%, it is likely to benefit Babcock, as governments generally like to keep defense spending local. The group is currently the second supplier to the Ministry of Defense.
And now could be a good time to invest.
Based on its FY24 earnings, Babcock is currently trading at 16.3 times its historical earnings. However, this is less than, for example, BAE Systems (19.5).
If it could attract the same multiple as its largest rival, its market capitalization would be 19% higher. And with Trump back – and the UK government committed to spending more on defense – I see no reason why this can't happen.
my plan
But I have concerns. The group recently reported £90 million of “cost overruns”on the construction of five ships for the Royal Navy.
And its dividend is miserable.
Furthermore, I know that investing in the sector is not everyone's cup of tea. But it's been over 4,000 years since the first army was established, which sadly tells me that global conflicts are here to stay. And I believe that the first act of government is to protect its people.
That's why I put Babcock on my watch list for the next time I have some extra money.
With its impressive 26% return on capital employed (FY24), a contract pipeline of £9.5bn (30 Sep 2024) and a relatively low level of leverage, I believe Babcock is well positioned to benefit from the second Trump's mandate and the UK government's commitment to spending more. in defense.
