Down 16% since August, this FTSE 250 defence firm looks cheap to me anywhere under £8.04

This FTSE 250 firm’s a leader in its field and should benefit from massive increases in European defence spending. At £4.10, it looks a bargain to me.

| 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.

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 firm QinetiQ (LSE: QQ) is down 16% from its 1 August 12-month traded high of £4.90. However, it is still up 25% from its 16 January one-year traded low of £3.29. And it has jumped 65% from its opening price on 24 February 2022 — the day Russia invaded Ukraine.

In my view, the drop since August is unsupported by recent results. I also think it is based on the false assumption that global security will improve in Donald Trump’s second presidency.

Consequently, now looks like a great opportunity to consider the stock for those investors whose portfolio it suits.

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

A false premise

It is true Trump has said he can end the Russia-Ukraine war in a day. It is also true that Israeli actions against Iran’s proxies have reduced Middle East hostilities.

However, it remains the case that the Russia-Ukraine war continues. And Syria looks to be a likely new focal point for further Middle Eastern conflict, in my view.

Additionally, European NATO members are increasing their defence spending to 2%+ of GDP. The shortfall in meeting this target over the past 30 years is estimated at €1.8trn (£1.5trn).

On 2 December, UK defence minister John Healey said the government will outline its plan to increase defence spending to 2.5% of GDP this spring.

A strong core business

QinetiQ looks to me to be in a great position to benefit from such spending increases. It was formed by the UK’s Ministry of Defence (MoD) when it split its Defence Evaluation and Research Agency. Since then, it has become a world leader in the evaluation, integration and securing of military mission-critical platforms and systems.

Its interim H1 2025 results released on 14 November saw revenue up 7.2% year on year – to £946.8m. Operating profit increased 6.5% to £106.6m, and earnings per share rose 6% to 14.2p. Additionally highly positive for me was net cash flow from operations soaring 83% (to £130.9m) while net debt tumbled 30% (to £190.9m). Orders over the period jumped 8.7% to £1.0348bn.

A risk here is that planned defence spending increases are reduced for some reason. That said, analysts forecast that QinetiQ’s earnings will increase 15.19% every year to end-2027. And it is this growth that ultimately powers a company’s share price (and dividend) higher.

How undervalued is the stock?

The firm trades at a price-to-earnings ratio of just 16.3 against an average 28.2 for its competitor group. So it looks very cheap on this basis.

The same is true on the price-to-book ratio, on which it trades at only 2.4 compared to a peer average of 3.1. And it also applies to the price-to-sales ratio, with QinetiQ at 1.1 against a 1.7 average for its competitors.

To ascertain what all this means in share price terms I ran a discounted cash flow analysis. Using other analysts’ figures and my own, this shows the stock is 49% undervalued at its present £4.10 price.

Therefore, its fair value is technically £8.04, although market vagaries might move it lower or higher than that.

Created with Highcharts 11.4.3QinetiQ Group Plc PriceZoom1M3M6MYTD1Y5Y10YALL16 Jan 202016 Jan 2025Zoom ▾Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '24Jan '2520212021202220222023202320242024www.fool.co.uk

Will I buy the stock?

I already own a defence stock (BAE Systems), so having another would unbalance my portfolio.

If I did not have it, I would see QinetiQ as a terrific buy at the current level and would purchase it soon.

5 stocks for trying to build wealth after 50

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy 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.

More on Investing Articles

Investing Articles

Here’s the dividend forecast for Rolls-Royce shares as Trump rocks the markets

Rolls-Royce shares have joined in the volatility over the past week. However, with the direction being largely downwards, the dividend…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Dividend yields of up to 11%! Here are 3 UK passive income stocks to consider

Searching for ways to supercharge your passive income with UK dividend stocks? Here are three that have grabbed our writer's…

Read more »

Young Caucasian woman at the street withdrawing money at the ATM
Investing Articles

£10,000 invested in NatWest shares at the start of 2025 is now worth…

NatWest shares surged into 2025, but things have become a little more complicated in recent weeks. Dr James Fox explores.

Read more »

Investing For Beginners

Why the FTSE 250 could outperform the FTSE 100 for the rest of the year

Jon Smith explains why the FTSE 250 could do better than its big brother when factoring in domestic exposure and…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Tariff fears send the Lloyds share price tumbling, but the dividend yield is climbing

Just when the Lloyds Banking Group share price had been rising steadily, along comes a global upheaval to knock it…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Here’s how a stock market crash could help an investor retire years early

A stock market crash can be alarming -- but for the well-prepared investor, it can also be an exceptional opportunity…

Read more »

Investing Articles

1 key fact to remember in this stock market correction

This writer takes a look at a FTSE 100 investment trust that is catching his eye after the recent massive…

Read more »

Investing Articles

I was wrong about the Tesla stock price!

Tesla stock's been affected more than most by ‘Liberation Day’. But our writer has other concerns about Elon Musk’s company.

Read more »