When it comes to UK defence shares, BAE Systems is the first name that comes to mind for many. But there’s a small-cap conglomerate that’s been doing exceptionally well recently.
In terms of market-cap, Cohort (LSE:CHRT) is less than a 20th of BAE Systems’ size. Despite this, the stock’s more than doubled in the last 12 months, giving investors their money back twice over.
Why’s the stock gone up?
In a world of increased political tensions, Cohort’s achieved impressive results. The latest update reports 25% revenue growth and earnings per share up 93%.
This however, isn’t the only reason the share price has gone up. A strong performance from the underlying business has got investors optimistic about the future.
In the space of a year, the price-to-book (P/B) ratio Cohort shares trade at has almost doubled – from around 2.35 to 4.46. That’s an important part of why the share price is up.
Cohort P/B ratio 2024-25
Created at TradingView
I’m not suggesting there’s anything wrong with this. But investors should note that – by its own admission – Cohort’s benefitting from unusually strong demand at the moment.
Importantly, demand isn’t showing signs of slowing. The firm’s order book grew by £139.2m in the six months leading up to November – more than the revenue it booked during the period.
That’s a solid indication demand isn’t about to disappear. But there are also reasons for thinking Cohort’s success isn’t just going to subside if international relations become more convivial.
Long-term growth
To attribute all of Cohort’s recent success to short-term cyclical factors is a mistake. It’s been making moves that should have lasting effects on both sales and profits.
One of these is that it’s been continuing to expand its operations by making acquisitions. The most recent of these is EM Solutions – a satellite communications business for naval operators.
This can be risky – if a firm pays too much for another business, the results can be bad for shareholders. But investors should note that Cohort has two significant advantages when it comes to this strategy.
First, management has a good record in this regard. Chess Dynamics is a good example – margins have expanded from 2% to 10% since it became part of the UK defence conglomerate in 2018.
Second, having an existing structure to fit businesses into makes things a lot easier. And this is something Cohort does benefit from, giving it an advantage when it comes to sourcing opportunities.
I think this is where investors should look for long-term growth. And with management sounding optimistic about the outlook on this front, there could well be room for optimism.
Should I buy?
Cohort shares have doubled in the last year, but that’s not to say they can’t do it again. With the stock already at an unusually high multiple though, future gains are likely to come down to earnings growth.
Sooner or later, Cohort’s going to face the challenge of defence spending moderating. But this shouldn’t cause investors to overlook the opportunities for long-term growth through acquisitions.
With my own portfolio, I’m wary of buying the stock right now. But I’m going to be on the lookout for opportunities when things look a bit calmer on the global political stage.
