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 Qinetiq Group Plc 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 Qinetiq Group Plc 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

But there may be an even bigger investment opportunity that’s caught my eye:

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

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.

More on Investing Articles

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

Around a 1-year high, is there enough value left in Next’s share price to make it worth me buying?

Next’s share price has risen a lot in eight months, but there could still be a lot of value left…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

OMG DYOR but IMO this ‘cool’ FTSE 100 stock offers bangin’ VFM!

Despite being one of the least trendy 50-somethings around, our writer considers how Gen Z could help push this FTSE…

Read more »

Investing Articles

2 cheap FTSE 100 and FTSE 250 growth stocks to consider as stock markets sink

I think these Footsie and FTSE 250 growth shares could be very shrewd buys to consider in the current climate.…

Read more »

Investing Articles

3 shares I’ve bought in the 2025 stock market sell-off

The stock market has experienced a lot of turbulence in recent weeks. Edward Sheldon has been taking advantage and buying…

Read more »

Investing Articles

Investors considering HSBC shares could aim for £8,453 a year in passive income from just £5 a day!

A relatively small daily investment in HSBC shares over several years can produce an extraordinary level of annual passive income…

Read more »

Investing Articles

The Rolls-Royce share price has fallen! Is this the moment investors have been waiting for?

Even the Rolls-Royce share price can't escape current stock market volatility, falling slightly over the last week. Should investors consider…

Read more »

Modern suburban family houses with car on driveway
Investing Articles

Down 59% from its 12-month highs, is this FTSE 250 stock too cheap to ignore?

Shares in FTSE 250 housebuilder Vistry are almost certainly too cheap to ignore. But are they discounted enough to offset…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

As the S&P 500 struggles to recover, here’s what Warren Buffett’s doing

The S&P 500 is fighting to regain its February highs amid ongoing trade tariff uncertainty. Our writer looks to the…

Read more »