Is it too late to buy this rising FTSE 250 defence star after its shares jump on Q1 update?

QinetiQ is a FTSE 250 high-tech firm that looks to me like it could be the next big thing in the UK defence sector, with its Q1 update bolstering my view.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Silhouette of a bull standing on top of a landscape with the sun setting behind it

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest £1,000 in Babcock right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Babcock made the list?

See the 6 stocks

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.

Created with Highcharts 11.4.3QinetiQ Group Plc PriceZoom1M3M6MYTD1Y5Y10YALL25 Jul 201925 Jul 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

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

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

Simon Watkins has positions in BAE Systems. The Motley Fool UK has recommended BAE Systems and QinetiQ Group Plc. 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.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More on Investing Articles

Smart young brown businesswoman working from home on a laptop
Investing Articles

Down 15% in a week! Are these 5 FTSE 100 fallers screaming buys as markets plunge?

Five of Harvey Jones's favourite FTSE 100 stocks all have the same thing in common – they've fallen around 15%…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

2 stocks that have been crushed and now offer a ton of value

Edward Sheldon has been scanning the market for stocks that offer value after the sell-off. Here are two shares he…

Read more »

Light trails from traffic moving down The Mound in central Edinburgh, Scotland during December
Investing Articles

£10,000 invested in Aston Martin shares at Christmas is now worth…

Aston Martin shares have fallen from above £10 in early 2020 to pennies today. Is this the perfect time for…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

Up 5% in the last crazy week! Are these 2 income stocks the ultimate FTSE defensive plays?

Harvey Jones picks out two FTSE 100 dividend income stocks that have actually climbed while stock markets are heading in…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

2 beaten-down UK shares that now look really cheap

Looking for cheap shares to consider for the long term? These two British stocks offer a lot of value right…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

As stocks tank, is this a rare chance for ISA investors to get rich?

Shares have collapsed globally and valuations are becoming, on paper at least, a lot more attractive. Dr James Fox explores…

Read more »

Investing Articles

2 strong FTSE 100 dividend shares to consider as recessionary risks increase

Looking for secure passive income stocks to consider buying as thumping trade tariffs loom? Here are two FTSE 100 dividend…

Read more »

Investing Articles

Can Greggs shares offer shelter from Trump’s tariff chaos?

Greggs' shares have plummeted in recent months. But with very little exposure to the US or tariffs, could the stock…

Read more »