Cuts in defence spending on both sides of the Atlantic have been painful for firms operating in the sector in recent years, but with Donald Trump now occupying The White House the outlook has improved dramatically for them. The new commander-in-chief has vowed to increase spending on infrastructure and defence, and this had led to many UK defence firms enjoying a strong rally since November’s surprising US election result.
Military prowess
Investors will no doubt be looking to FTSE 100 giants such as BAE Systems or perhaps even aircraft engine-maker Rolls-Royce to get in on the action, with the hope of profiting from the somewhat unconventional new president’s lust for military prowess. But I believe there could be even better options for investors wanting to cash-in on the defence spending spree.
Ultra Electronics (LSE: ULE) specialises in applying highly-advanced electronic and software technologies to provide solutions and products to the defence & aerospace, security & cyber, transport, and energy markets. The Middlesex-based group has world-leading positions in many of its specialist capabilities and, as an independent, non-threatening partner, is able to support all of the main prime contractors in its sectors.
Mission critical
As a result of such positioning, the firm’s systems, equipment and services are often mission or safety-critical to the successful operation of the platform to which they contribute. This mission-criticality secures the company’s positions for the long term, which in turn has helped to underpin its strong financial performance over the years.
The FTSE 250-listed group has an excellent track record, achieving growth in underlying earnings in all but one of the last 15 years. With analysts forecasting continued steady growth for the foreseeable future, I see no reason why the share price shouldn’t continue on its upward curve for many years to come. The relatively modest valuation of 15.5 times earnings also means it could be a good time to buy.
Organic sales growth
Another London-listed firm that could benefit from the new US administration is GKN (LSE: GKN). The Redditch-based global engineering group serves both the aerospace and automotive markets, with the former hoping to profit from increased military spending over the coming years.
In its latest trading update, the FTSE 100 group reported good organic sales growth during the first quarter of its financial year as it continued to benefit from favourable currency translation, with the automotive market performing better than expected, and growth in aerospace being slightly slower than previously anticipated.
Attractive valuation
The group’s trading margin was ahead of last year primarily due to an increase in its Driveline division, although it and the Powder Metallurgy division are seeing an impact from higher raw material costs. Meanwhile the Aerospace division saw modest organic growth during the quarter.
GKN’s share price has performed well over the past year, gaining 27% in just 12 months, but I still see further upside over the longer term, with rising earnings leaving the shares trading on a very attractive P/E rating of just 10.
