Every so often, a stock comes along that could soar and boost shareholder’s wealth massively. Is FTSE 250 incumbent QinetiQ (LSE: QQ.) one such stock?
Let’s take a closer look.
Defence business created by the defence department
Created in 20021 by the UK’s Ministry of Defence (MoD), the business tests and evaluates technology for military and civillian use. Back in 2003, it signed a 25-year deal with the MoD to provide its services. It also provides its services to other firms through its US-based Avantus business.
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The shares have been doing well in the past 12 months. They’re up 27% from 349p at this time last year, to current levels of 444p.
I reckon a big part of this has to do with the increased number of conflicts globally at present.
To buy or not to buy?
As noted, the unfortunate events across the world have led to a spike in defence spending. I must admit I’m an advocate of peace and hope all conflicts come to a speedy and peaceful resolution. One of the risks here is that if this were to happen, defence spending may not be a priority, and QinetiQ’s earnings and returns could be dented.
Continuing with bearish aspects, a consistent worry of mine for any product-based business is that of operational issues. Competition, failure of a product, and other issues could hurt firms like QinetiQ.
Moving to the other side of the coin, there’s lots to like, in my view. Firstly, defence spending is currently at all-time highs, according to research giant Statista. This could be good news for the earnings of defence firms, including QinetiQ.
Next, QinetiQ’s connections with the MoD is a major plus point. Having such close connections to the government could bode well for earnings and performance, and this could translate into consistent returns for years to come.
In relation to this, QinetiQ’s 2024 report released two weeks ago made for good reading. Revenue, underlying profit, earnings per share, and its order book all increased nicely, to mention a few highlights.
Finally, the shares look good value for money on a price-to-earnings ratio of just 18. This is much lower compared to a peer group average ratio of close to 38. Furthemore, a dividend yield of close to 2% could continue to grow in line with the business. However, I do understand that dividends are never guaranteed.
My verdict
QinetiQ could benefit from continued defence spending. I’m not worried about conflict resolution hurting the business, as defence spending covers much more than weapons.
Plus, the firm’s close links to the government, as well as enticing valuation and passive income opportunity make it look like a great opportunity at present.
It could play a pivotal role as part of my holdings to build greater wealth. I don’t think it could create generational wealth alone, but definitely still a good stock to buy for me. I’d be willing to buy some shares when I next can.
