FTSE 250 defence star QinetiQ (LSE: QQ) is near its all-time £4.80 high following its 18 July Q1 trading update.
This reaffirmed that it is on track to achieve its key performance targets from now to 2027.
From 2024-25, it expects to deliver high-single-digit organic revenue growth, at a stable operating profit margin. This is based on its £1.74bn order book (up from £1.72bn the previous year), 64% of which is under long-term contract.
For 2025-26, it expects to make about £2.4bn of organic revenue at a margin of around 12%.
The firm added that the £100m share buyback announced in its full-year 2024 results will be completed this financial year. At that time, it also announced an increase in its annual dividend to 8.25p (currently yielding 1.8%), from 7.7p.
Could the shares go higher?
It is a common misconception that shares that have risen sharply may have little or no value left in them.
This is not true. A company could simply be worth more than it was before. Or the markets might be in the process of catching up with that new valuation.
In fact, it could be that a firm is worth more than even its current share price implies. This is the case with QinetiQ, I think.
There are risks in the company, of course, as with all firms. A malfunctioning product could be very costly, given how expensive research and development is in this sector. Additionally, an extended period of peace, much as we want to see that, would probably hit demand for its products.
How much value is left in the stock?
On the key price-to-earnings ratio (P/E) of stock valuation measurement it trades at just 19.3. This is very cheap compared to the average 37.1 P/E of its peers.
The same applies to its price-to-book ratio (P/B) of 2.9 against a 4.7 peer group average. And it is also true of its 1.4 price-to-sales ratio (P/S) compared to its peers’ average of 1.7.
I used a discounted cash flow (DCF) analysis to ascertain how much of a bargain QinetiQ is in cash terms.
This shows it to be 40% undervalued at its current price of £4.67. So a fair value for the shares would be £7.78, although they may go lower or higher than that.
However, it confirms to me how much value is left in the stock, despite its price rise.
Will I buy the shares?
The sector in which QinetiQ operates looks set for major further expansion. The world has become an increasingly dangerous place since Russia invaded Georgia in 2008.
This is likely to continue as the war in Ukraine continues. China’s rhetoric over Taiwan remains an additional global security threat.
I also do not doubt that the firm will meet its strong growth targets. This should support further share price rises and increased dividends over time, I think.
For these reasons, I would buy QinetiQ today if I did not already have a holding in the defence sector, BAE Systems.
