FTSE 250-incumbent QinetiQ (LSE: QQ.) could be a great pick to offer me exposure to the defence sector.
At present, BAE Systems (LSE: BA.) seems to be the most popular option, in my view.
Let’s take a look at QinetiQ shares in more detail.
Big business
QinietiQ was created from the Ministry of Defence (MoD) back in 2001, and specialises in testing applications for military and civilian use.
Defence spending has skyrocketed in recent years. This has been exacerbated by recent tragic geopolitical conflicts. Although I’m hoping for peaceful resolutions, there’s much more to defence spending than weapons for war.
The shares have had a fantastic 12-month period. They’re up 48% from 324p at this time last year, to current levels of 481p. BAE Systems is up 40% in the same period.
The investment case
QinetiQ has recorded two great trading updates. A report for 2024 released in early June made for good reading. This included a nod to increases in revenue, order book, profit, and dividends, compared to 2023.
Coming up to date, a Q1 update released last week confirmed the order book had grown, compared to the same time last year. A big chunk, 64%, was long-term contracts. Plus, it is on track to deliver key targets between now and 2027. An example of one is high single-digit organic growth.
According to Statista, defence spending has actually reached all-time highs, and shows no signs of slowing. This could spell good news for firms like QinetiQ to keep growing earnings and returns.
I must admit I’m buoyed by QinetiQ’s sticky relationship with the MoD. This offers it direct access to the UK government, and potentially lucrative contracts.
Digging into some fundamentals, QinetiQ shares look cheaper than many of its peers. They currently trade on a price-to-earnings ratio of just over 16, compared to a peer group average of 37. To continue the comparison, BAE shares trade on a ratio of 23.
Finally, QinetiQ shares offer a dividend yield of 1.8%. Although dividends are never guaranteed, I can see this level of return increasing. BAE shares offer a yield of 2.31%.
Risks and final thoughts
From a bearish view, the obvious risk is that conflicts being resolved could dent earnings for all defence stocks. However, QinetiQ’s business spans more than just military applications and defence, so this isn’t a major concern for me. Plus, with any product-based business, there’s always a worry that product failure, malfunction, or operational issues could have reputational and financial damage to a business, not to mention investor sentiment.
Overall, I would say QinetiQ is a great alternative pick to gain exposure to the defence sector.
The shares are cheaper than BAE, and potentially have more chances of growth, if you ask me. BAE is already a mammoth beast in its own right. I wouldn’t necessarily say QinetiQ shares are better than BAE shares. However, they could be a cheaper alternative, with continued chances of growth.
I’d be willing to buy shares in QinetiQ if I had the cash to spare.
