FTSE 250 incumbent QinetiQ (LSE: QQ.) is perhaps slightly overlooked when it comes to defence stocks, if you ask me.
Here’s why I reckon investors should take a closer look at the stock.
Defence tech and security
Defence stocks have risen in prominence in recent months due to the unfortunate conflicts around the globe. I’m one of the many hoping for a peaceful and speedy resolution across these issues.
QinetiQ is a leading defence tech business that specialises in manufacturing and supplying products such as sensors for weapons, cyber security, and more.
So what’s happening with the QinetiQ share price? Over a 12-month period, the shares are up 10% from 327p at this time last year, to current levels of 360p.
The bull case
It’s worth mentioning that data currently shows that defence spending is at all-time highs. As the world continues to evolve and develop, as well as experience a population increase, governments are spending heavily on protecting themselves. This is good news for QinetiQ, and other defence businesses, as it could boost performance and returns.
The firm’s most recent update, an interim report released in November, made for good reading, in my view. Revenue rose by an impressive 31%, compared to the same period last year. Plus, operating profit jumped by 35%, supported by a 19% increase in orders, to record a new high of £953m. I’m excited to see further updates, due in April for Q4 results, and May for the full year.
Next, the shares look good value for money to me on a price-to-earnings ratio of just 15. Furthermore, analysts reckon this will go down to just 12, based on future forecasts. However, I’m conscious that forecasts don’t always come to fruition.
Finally, a dividend yield of 2% would boost my passive income stream. In addition to this, a share buyback scheme was announced in January too, which is pleasing to see and a sign of confidence in the firm’s future, and investor returns policy. However, I’m conscious that dividends are never guaranteed.
Risks and final thoughts
I must admit that the biggest risk for me is the potential cyclical nature of defence spending, despite recent positive trends. Once existing orders are fulfilled and conflicts wind down, could defence spending be scaled back? There is a chance of this. In turn, any drop could hurt QinetiQ’s performance, and returns.
Next, QinetiQ’s lack of diversity makes it less appealing than other defence businesses, like, for example Rolls-Royce. Relying solely on defence, especially if the first risk mentioned comes to fruition, is a tad risky from an investment perspective. For context, Rolls-Royce also has other divisions, such as aviation, it can make money from.
Overall I definitely think there’s enough meat on the bones for QinetiQ shares to continue their positive trajectory, and provide juicy dividends. For this reason, I would personally be willing to buy some shares when I next have some investable cash.
