One value stock I’m adding to my holdings the next time I have some spare cash to invest is QinetiQ (LSE: QQ.). Here’s why.
Defence tech
QinetiQ is one of the world’s leading defence tech and security businesses. It manufactures and supplies products such as sensors for weapons, robotic systems, and advanced computer security systems.
So what’s happening with QinetiQ shares? As I write, they’re trading for 309p. At this time last year, the shares were trading for 337p, which is an 8% drop over a 12-month period. Many stocks have struggled due to macroeconomic issues in recent months.
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A value stock with huge potential
I’m of the belief that QinetiQ, and other businesses in the sector, could benefit hugely from the rise in defence spending. Geopolitical tensions and the rise and adoption of sophisticated tech have contributed to this, in my opinion. In fact, global defence spending is at all-time highs and shows no signs of slowing down.
Now I’m not one to advocate profiteering from war and I’m definitely part of the majority of the world hoping for any and all conflicts to end peacefully. That said, security and defence goes beyond war. Security and defence can mean simple things like computer systems to protect against online malware attacks, to give an example. This rise in defence spending could boost QinetiQ’s bottom line and boost investor returns too.
Moving to QinetiQ’s valuation, the shares look attractive to me on a price-to-earnings ratio of just over 11. This is lower than the FTSE 100 average of 14. In addition to this, the shares would also boost my passive income with a dividend yield of 2.5%, which could grow in line with the business. However, I do understand that dividends are never guaranteed.
Finally, QinetiQ had an impressive 12-month period ended March 2023. Orders increased by a mammoth 41%. Furthermore, new contract wins are beginning to roll in nicely. For example, it won a five-year contract to support the US Space Development Agency in one of its projects worth $224m.
Risks and final thoughts
Despite my bullish stance on QinetiQ shares and viewing it as a value stock candidate, there are risks to consider. To start with, it relies on acquisitions for growth, as well as organic measures. This is great when acquisitions work, but when they don’t work, well, that can be costly and impact the bottom line, sentiment, and investor returns.
Another risk for QinetiQ and it’s line of work is that if it were to experience any product failure or malfunction, its reputation would be in tatters. This could impact existing contracts, as well as future performance, its balance sheet, and investment viability.
To conclude, I’m a fan of QinetiQ and see some potentially lucrative times ahead. There are risks to consider but that is the case with every stock out there. At present, an enticing valuation, passive income opportunity, and a burgeoning trading environment make it look like an ideal value stock for me and my holdings. It’s the type of stock I’d be willing to buy and hold for a long time.
