Cobham plc Surges 8%: Is It A Better Buy Than Chemring Group plc, Senior plc And QinetiQ Group plc?

Which of these aerospace and defence stocks is the best buy? Cobham plc (LON: COB), Chemring Group plc (LON: CHG), Senior plc (LON: SNR) or QinetiQ Group plc (LON: QQ)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »