Last week wasn’t particularly pleasant for the Qinetiq (LSE:QQ) share price. Shareholders of this UK defence business watched the stock collapse by double-digits last Thursday after management released a trading update. Some of this negative performance did reverse the following day. And its 12-month return is still around 13%. But the question remains, what spooked investors? And is this decline actually a buying opportunity for my portfolio? Let’s take a closer look.
The Qinetiq share price tumbles on trading update
In the words of management, the company has achieved “strong underlying operating performance” and “continued strategic momentum”. Looking at the initial numbers, I’m inclined to agree. Defence order intake reached £700m, roughly 25% higher than the first half of its 2021 fiscal year (from April 2020 to April 2021). This is largely thanks to securing new contracts with the US Army, the Australian Department of Defence, and the UK Ministry of Defence. As a result, revenue growth is estimated to be around 5% for its 2022 fiscal year.
Five percent hardly sound particularly exciting. But given that the defence industry average revenue growth rate is around 3.2%, that’s not bad, in my opinion. So why did the Qinetiq share price fall?
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Despite the firm’s efforts to emphasise its progress, it seems investors were less than pleased to hear that supply chain disruptions are creating problems. The company is trying to find a quick solution. But it has warned that the situation may create a one-time £15m expense. Comparing that with last year’s operating income of £119m shows a potential 13% decline in underlying earnings. And to add fuel to the fire, the mission shift out of Afghanistan has resulted in operating profit margins coming in at the lower end of previously issued guidance, placing the margin around 11%.
Needless to say, that’s not good news. So, seeing such a sharp decline in the Qinetiq share price is hardly surprising.
Taking a step back
As frustrating as the situation is, supply chain disruptions are ultimately a short-term problem. And the adverse effects could be easily reversed in the future. How? Qinetiq’s US operations have been something of a disruptive force. And management is actively pursuing its goal of doubling the size of this division over the next five years through a mixture of both organic and acquisitive growth.
Meanwhile, the firm’s ability to continue securing new contracts worldwide serves as supporting evidence that demand isn’t going away. And with an estimated $20bn addressable market size, the long-term growth opportunities for Qinetiq and its share price seem plentiful. At least, that’s what I think.
The bottom line
All things considered, if I were a shareholder, I wouldn’t be too concerned about this trading update. However, is this a buying opportunity for me? Well, I’m not so sure. It’s hard to make an informed decision about the future of the Qinetiq share price without more data. And CEO Steve Wadey wasn’t particularly generous with details on the earnings call.
The company is planning to release its interim results on 11 November. So for now, I’m going to keep this business on my watchlist until I know more.
