Shares in defence company Cobham (LSE: COB) have soared by as much as 8% today after it reported a surge in pretax profit for the first six months of the year. In fact, Cobham’s adjusted pretax profit rose from £118m in the first half of 2014 to £135m in the same period of the current year. That’s a gain of 14.4% and the key reason for it was the contribution of acquired telecommunication equipment manufacturer, Aeroflex. This pushed Cobham’s revenue to over £1bn in the period and caused an almost one-third increase in the company’s order book.
Of course, the acquisition came with significant costs which hurt Cobham’s reported pretax profit. However, when these are excluded, the underlying performance of the business remains strong, with organic revenue growth of 0.3% showing that the company is moving in the right direction.
Looking ahead, Cobham is expected to grow its earnings by 15% in the current full year, and by a further 6% next year. This is a strong growth rate and, despite this, the company’s shares trade on a rather modest valuation. They currently have a price to earnings (P/E) ratio of 13.2, which indicates that additional share price growth could be on the horizon over the medium to long term. And, with Cobham currently having a yield of 4.1%, it also appears to be an enticing income play, too.
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Of course, there are other excellent opportunities within the defence sector, too. A notable example is Chemring (LSE: CHG) which, despite having a tough five years during which time its share price has fallen by 60%, appears to be a sound buy. That’s because Chemring is expected to reverse three years of declining profitability by delivering an increase in its earnings of 21% in the current year, followed by further growth of 20% next year.
This could bolster investor sentiment in the company and show that it is making a successful turnaround after three challenging years. And, with its shares trading on a price to earnings growth (PEG) ratio of just 0.7, they appear to offer growth at a very reasonable price.
However, other defence and aerospace stocks appear to hold less appeal than Cobham and Chemring at the present time. Certainly, the likes of QinetiQ (LSE: QQ) and Senior (LSE: SNR) are high-quality operations with impressive track records and bright long term futures. Given their growth potential in the medium term, though, they appear to be somewhat overvalued.
For example, QinetiQ is expected to grow its earnings at an annualised rate of just 1.5% during the next two years, which is disappointing. Despite this, it trades on a higher P/E ratio than Cobham, with QinetiQ having a rating of 15.2. Similarly, Senior may have been able to post earnings growth in each of the last five years, but with its bottom line forecast to rise by just 1% this year and by a further 6% next year, its P/E ratio of 14.8 seems somewhat excessive.
