FTSE 250 firm Chemring Group (LSE: CHG) looks exactly the sort of firm to me that will benefit from Donald Trump’s second presidential term. It provides advanced technology products and services to the aerospace, defence and security markets.
In his first term in office, Trump warned European NATO members that they must increase their defence spending. At that point, the target was 2% of gross domestic product (GDP). For last year, 23 of NATO’s 32 members are likely to have reached that figure.
However, according to a 20 December Financial Times report, Trump told European officials he wants this to rise to 5%.
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A compelling product mix
Regardless of whether the Ukraine war ends, NATO will continue to build its defences against further Russian aggression, I think. Indeed, on 12 December NATO Secretary-General Mark Rutte said: “It is time to shift to a wartime mindset.”
In this context, Chemring designs and manufactures cutting-edge products in the Sensors & Information, and Countermeasures & Energetics sectors. These include unique systems for chemical and biological threat detection, and electronic warfare capabilities. It also produces systems for the detection of improvised explosive devices.
Aside from its big military clientele, it has civilian customers including NASA and SpaceX. It is also a leader in advanced military explosives in partnership with subsidiary Chemring Nobel.
The 2024 results
Chemring’s share price dropped 12% after the 17 December release of its 2024 results. This looked to me like an extraordinary overreaction to one negative element in otherwise excellent numbers.
Specifically, the firm’s operating margin fell to 13.9% from 14.6% in 2023. Chemring explained this was partly due to production delays at its Tennessee factory that builds infrared devices. Another part was attributable to extending a lower-margin legacy US government contract from 2016 to 2025.
Aside from that, revenue increased 8% year on year to £510.4m, and statutory operating profit jumped 28% to £58.1m.
Chemring’s order book reached an all-time high of £1.038bn, up 13% from the prior year’s £922m. Since Russia invaded Ukraine in 2022, it has jumped 59%.
A risk to its business is any major failure in a key product, which would be costly to fix and might damage its reputation.
However, analysts forecast its earnings will grow by 17.1% a year to the end of 2027. And it is increases in earnings that drive a firm’s share price and dividend.
Are the shares a bargain buy now?
A discounted cash flow analysis shows Chemring shares are 63% undervalued at their current share price of £3.31.
Therefore, a fair value for the stock is technically £8.95, although market vagaries might push it lower or higher.
However, it underlines to me that the shares look an extremely good buy at this level.
Will I buy the stock?
Aged over 50 now, I focus on very-high-yielding stocks. I aim to maximise the dividends from these to continue reducing my working commitments.
Chemring currently gives a return of 2.4%, which is not in the 7%+ bracket I look for. So, it is not the right time for me to buy the shares.
That said, if I was still looking for very-high-growth potential stocks, this would be one to fit that bill.
