Yes, I know, it’s a terrible pun, but I really do think the Aerospace and Defence sector is defensive in more ways than one, and I reckon it’s a great sector to be in for the long term to beat our likely post-Brexit economic weakness.
I’m not the only one who thinks so, as you’ll see if you take a look at the QinetiQ Group (LSE: QQ) share price chart. QinetiQ shares have climbed 58% over the past two years, and others in the same sector have been gaining too, even if not to the same extent.
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The QinetiQ price gained an extra 6% Thursday morning on the back of interim results, as the six months to 30 September brought in a 16% jump in operating profit over the same period a year ago, to £59.7m. Underlying earnings per share picked up 14%, and the interim dividend was kept level at 2.2p per share.
The firm’s total funded order backlog has soared to £3.1bn, with £411m in orders added in the period. And on the cash front, net operational cash flow rose by 50% to £77m, with net cash at 30 September standing at £173.5m — down from £220.8m a year previously, but still strong.
Forecasts put the shares on a P/E of 16.5, though that’s based on a predicted modest drop in full-year EPS, and I think that will need to be upgraded now. Dividend yields are modest at around 2.2%, but they’re progressive and that’s what really matters.
Does this look, in Warren Buffett’s words, like a great company at a fair price? I think so, a very fair price indeed considering QinetiQ’s excellent cash flow characteristics. It’s in the top 10 on my potential buy list.
Shares in Meggitt (LSE: MGGT) haven’t done quite as well as QinetiQ’s, but we’re still looking at a 30% gain over two years, and the stock is valued on a P/E multiple of 17.7 this year, dropping to 16 on 2020 forecasts. That’s a slightly higher valuation than QinetiQ, but dividend yields are a bit better too at around 2.8% while still being attractively progressive.
At the interim stage, Meggitt reported a more modest gain in underlying operating profit at 6%, with underlying earnings per share up by the same percentage. In this case we saw a 5% boost to the first-half dividend, which is in line with full-year expectations.
Free cash flow was up by an impressive 80%, but the first major difference between the two companies is cash — Meggitt was carrying net borrowings of a little over £1bn at 30 June.
The firm’s Q3 update a couple of days ago looked reasonably positive, and apart from some fallout from the Boeing 737 MAX problems, trading was better than expected. Margins are being squeezed a little, though organic revenue outlook has been lifted a fraction from the 4%-6% range to 6%-7%.
With forecasts for EPs growth of 7% this year and 11% next, after a few years of ups and downs (which is common in this industry with its years-long contracts and periodic payments), I think Meggitt looks like a decent long-term investment.
But for me it’s not up with QinetiQ, which remains my pick of the sector.