Chemring (LSE:CHG) shares are up 146% in the last five years, growing at an average rate of around 20% per year. The company is a developer of products and services for the aerospace and defence sector, serving national defence and security agencies in the UK and abroad.
It reportedly holds 50% of the global market for countermeasures – that is, systems that protect aircraft, ships, and other vehicles against guided missile threats. It also develops sensors to detect explosive devices and biological threats.
With conflicts in Ukraine and the Middle East escalating, demand for Chemring’s products has grown significantly in the past five years. It has even outdone one of the UK’s largest defence contractors, BAE Systems, which only saw a 126% share price increase in the same period.
A triple-fold investment
If I had bought 800 Chemring shares five years ago, when they were £1.42, it would have cost me just over £1,100.
Today, they would be worth over £3,000 – factoring in a reinvested 2% dividend yield paid quarterly. That may not seem like much but it’s almost triple the original investment – without any further contributions.
Had I bought £10,000 of shares, I would have earned close to £20,000 in returns. That same money in a standard UK savings account would have earned me less than £2,000 in interest.
If I had contributed an extra £100 a month to my investment, it would be over £37,700 now. At that level, I would be earning an additional £600 a year in passive income from dividends.
But of course, hindsight is 20/20.
Looking back, it’s difficult to say if I would have bought and held Chemring shares for that long. I couldn’t have known for sure that the company was going to do this well. Had it done badly, I could easily have lost a significant amount of my initial investment.
The question now is, will Chemring’s good fortunes continue or should I be looking for the next growth stock?
Future prospects
Rather than showing signs of resolution, global conflicts have only increased of late. So long as these continue, Chemring’s customers will require increasingly advanced defensive countermeasures.
For this reason, I imagine Chemring’s share price will continue to grow for at least a few years still. Analysts appear to be in agreement, reaching relatively good consensus that Chemring is undervalued by around 60%.
Forecasts, on average, predict the share price will increase to £4 in the coming 12 months.
However, it seems that those close to the company aren’t so confident. In the past three months, Chemring insiders have reportedly sold £728,000 worth of shares. I wouldn’t consider this a serious risk as I don’t know why they sold, but it’s worth noting.
Furthermore, the UK aerospace and defense industry had an overall return of 29.7% over the past year – higher than Chemring’s 25.4% returns. This would indicate that Chemring’s competitors have outperformed it in the past year.
While I may have missed out on the best gains, I still think Chemring would make a good addition to my portfolio – along with a mix of other defence stocks.
