Babcock shares pop 13% as CEO says new era for defence'

'New era for defence': U.K. defence contract Babcock shares pop 13% after raising growth forecast on European rearmament

Shares of British defence contractor Babcock surged more than 10% after the company announced an unexpected share buyback program and raised its medium-term growth forecast.

The London-listed company met expectations for financial year 2025 with sales of £4.831 billion ($6.58 billion) and marginally beat earnings estimates with £363.9 million adjusted profit, according to FactSet compiled data.

Babcock, which makes Type 31 frigates for the U.K.'s Royal Navy, said that, as it is flush with cash and had lowered its debt ratio sufficiently, it was returning money to shareholders through a £200 million share buyback that will be expected over the current financial year.

“This is completely unexpected and we think it will be very well received by investors,” said JPMorgan analyst David Perry, in a note to clients.

The stock is up more than 115% over the past year. Even after Wednesday's stock rally, the Wall Street bank analyst say shares could rise a further 17% to £1.37 over the next 12 months.

Babcock also raised its medium-term profit margin growth forecast to 9%. The company said it is expecting to achieve underlying operating profit margins of 8% in the 2026 financial year, earlier than planned.

Chief Executive David Lockwood told analysts that the company is well-positioned to capitalize on Europe's defence rearmament drive. “I think it's clearly a new era for defense if you look at what's going on at NATO,” Lockwood said in an earnings call, according to FactSet.

“For companies like Babcock, when you have declining budgets, which we've had for most of my working life, the industry is somewhere where you make cost savings,” he added.

Lockwood added that “the various conflicts around the world will feel unstable. Governments will feel the need to look after their citizens.”

“I had to wait to my sixties to become cool as a business leader because it's now cool to be in defense is amazing the way we actually matter and people recognize we matter,” he added.

Defense stocks jump

European defense stocks rallied on Wednesday morning, as world leaders gather in The Hague, Netherlands, for the annual NATO summit.

The military alliance's 32 member states, with the exception of Spain, have reportedly agreed to hike their defense spending target to 5% of gross domestic product.

The regional Stoxx Aerospace and Defense index was last seen around 1.2% higher. Year-to-date, the index has gained close to 50%.

On Wednesday morning, the European defense sector's top movers were British engineering giant Babcock International, up 12%, Italian aerospace firm Avio, which gained 2.5%, and Germany's Renk, up 2%.

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European stocks open higher

It's around 25 minutes since the opening bell, and European stocks are broadly trading in positive territory.

The pan-European Stoxx 600 index was last seen up by around 0.3%, with all major bourses in the green. France's CAC 40 is up by 0.4%, while London's FTSE 100 has gained 0.2% and the German DAX is trading flat.

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Sterling strengthens after hitting 3-year high

The British pound was marginally higher against the U.S. dollar this morning and was last seen trading at around $1.363.

On Tuesday, sterling had hit its highest level versus the greenback since January 2022.

The pound was up by around 0.1% against to trade at 1.173 euros on Wednesday morning.

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Here are the opening calls

Good morning from London, and welcome to CNBC's live blog covering European financial markets action on Wednesday, and the latest regional and global business news, data and earnings.

Futures data from IG suggests a positive start for European markets, with London's FTSE looking set to open unchanged at 8,764, Germany's DAX up 0.2% at 23,699, France's CAC 40 flat at 7,625 and Italy's FTSE MIB also up 0.3% at 39,673.

Global market sentiment rose Tuesday on bets that the ceasefire between Iran and Israel could last, after a shaky start to the truce that saw President Donald Trump lambast both countries for violations.

Traders are also digesting the latest comments from the U.S. Federal Reserve Chair Jerome Powell, who said Tuesday that the central bank was committed to keeping inflation in check, and would likely keep rates steady until there's more clarity on how trade tariffs might affect prices.

Powell said policymakers were “well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance.”

What to keep an eye on today

European markets will be keeping a close eye on events in the Middle East on Wednesday to see if a fragile ceasefire continues between Israel and Iran.

Meanwhile, the NATO summit in the Netherlands concludes Wednesday, with the alliance's 32 member states expected to issue a formal joint statement on hiking their defense spending target from 2% to 5% by 2035. President Donald Trump joined the summit Tuesday evening.

CNBC's Steve Sedgwick is in The Hague for the gathering and will be speaking to Finnish President Alexander Stubb and German Foreign Minister Johann Wadephul today.

On the data front, French consumer confidence and Spanish gross domestic product figures are due.