Should I buy shares in defence stock QinetiQ?

The QinetiQ share price has been rising at a slow and steady pace. Is this robotics and AI defence stock a suitable long-term investment for me?

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UK defence tech stock QinetiQ Group (LSE:QQ) is a FTSE 250 constituent with big ambitions. It has a strong working relationship with the European Space Agency, partners with BAE Systems and serves the military. Its biggest markets are the UK, US and Australia. The group makes autonomous robotic systems for the army and airborne surveillance systems. All very impressive. But the QinetiQ share price tends to fluctuate, although it has gradually risen over the past year. 

70% growth

On 20 May, the group produced strong annual revenue numbers, delivering its fifth year of growth. Since 2016, it’s grown its revenue by 70%. During FY21 profit rose 14%, revenue 19% and earnings per share (EPS) increased 11%. Best of all, its orders rose 18% for its largest order intake in a decade. QinetiQ also reinstated its dividend.

Its tech capabilities reach across automation, AI, and robotics. As a recent example, QinetiQ transformed existing military vehicles into electrified hybrid tanks. This reduces the need for fuel in far-flung places and improves stealth. This is also helping with its ESG goals.

What does the future look like?

The company now has its sights set on growing another 70% in the next five years, with a particular focus on boosting its US presence. The US defence market is extensive but quite outdated and wants to modernise, so there’s a big opportunity there.

The company acquired MTEQ in December 2019. This is a leading US provider of advanced sensing solutions, giving military personnel an advantage in the field. QinetiQ hopes this acquisition will help it transition into a leader in robotics, autonomy and advanced sensing. But to reach its goals, the company plans still more acquisitions.

QinetiQ financials

QinetiQ is a £1.8bn company with a price-to-earnings ratio (P/E) of 15 and EPS are 21p. It also offers a dividend yield of 2%. In the past five years, the company share price has risen 41%, so it’s been a slow and steady increase, but there’s also been extreme volatility along the way. The QinetiQ share price is currently 14% below its pre-Covid highs.

It tends to fluctuate based on company news and to trundle along in between. I believe its share price will suffer if it doesn’t achieve the lofty targets it has set. On the other hand, if it can meet its growth targets then it stands to offer shareholders considerable upside.

The world is still a volatile and geopolitically sensitive place. I think this means there will be plenty of money being ploughed into defence in the coming years. Yet to achieve its ambitious goals, QinetiQ is going to need to win bigger, longer-length contracts and competition is fierce.

According to Statista, the global robotics industry is forecast to grow at a compound annual growth rate (CAGR) of 26% until 2025. Tech stocks, particularly in robotics and AI, were a big deal in 2020, but many have been over-hyped. With a P/E of 15, I don’t think that’s the case with QinetiQ.

Overall I think QinetiQ looks a good company. So would I buy? I’m tempted, as I like its prospects and dividend yield. But I already have shares in BAE, so to keep diversified I don’t plan to add another defence business to my Stocks and Shares ISA today. Nevertheless, I’ll keep it on my watch list.

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.

Kirsteen owns shares of BA. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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