Questor share tip: Buy Babcock for big deals The company is in such a strong position because it has defensive revenue streams. Babcock refits and maintains many of the Royal Navy ships and submarines and owns or runs shipyards at Faslane, Rosyth and Devonport. Its chairman is Mike Turner, a former boss of BAE Systems. The defence work the company bids for requires security clearance and customer confidence and this provides high barriers to entry. Babcock also controls a pool of highly skilled engineers of which there is a national shortage. Both these factors allow Babcock to price strongly and achieve attractive profit margins on work The group has predictable and steady revenues. At the end of September an order book of £12bn gave the company certainty over half of its revenue for the year ended March 2015. Of the contracts it is already working on, the company has a 90pc success rate on re-bidding. The company has a 45pc success rate on new contrcts, and a £15.5bn bid pipeline of prospective work. The company is well placed to pick up work from a government keen to cut costs. In the six months ended September group revenue increased 9pc to £1.58bn, and pre-tax profits jumped by about a third to £106m. The core marine and technology division is performing well. Providing engineers on the new Queen Elizabeth class aircraft carriers is on track and the £350m overhaul of nuclear submarine HMS Vengeance is progressing well. The marine division reported revenue up 16pc to £654m, the majority of which was organic growth, while profit increased from £62.4m to £69.6m at the half-year stage. The other big opportunity for the outsourcing group is around the British nuclear industry. Babcock has signed an agreement with EDF Energy to assist on the country's first nuclear plant in a generation at Hinkley Point in Somerset. Babcock is exposed to more risk on some of its naval profits. The government has asked for any cost overruns on the Queen Elizabeth carrier projects to be shared 50:50 with Babcock, up from 10pc previously. However, Babcock said in the half-year results that the total risk is still capped at any potential profit on the project. Government decisions to outsource defence projects are also taking longer than expected and this could mean earnings take longer to feed through from the order book. Babcock shares are near record highs trading on 18 times forecast earnings, falling to 16 times next year. That is a premium to sector peers and well above historic averages for the forward P/E ratio of about 12 times. That said, the company should have an exciting 2014 and will benefit from issues at rival Serco, so we retain our recommendation.