I would have bought FTSE 250 defence firm QinetiQ (LSE: QQ) in early 2022 but for one reason.
I was over 50 even then and focused on high-yield stocks that could provide me with substantial dividends. My aim was – and remains – to use these to continue reducing my working commitments. QinetiQ’s yield back then was only around 2% a year, which is nowhere near the 7% I look for.
Since Russia invaded Ukraine on 24 February, QinetiQ’s share price has doubled. Other defence shares I already held before turning 50 have also done well, so I am not unduly perturbed.
I remain focused on high-yield shares, and QinetiQ’s still deliver about 2%, so they are still not for me.
However, for investors whose portfolios the stock suits, I think it is very well worth considering.
Is the business set for growth?
Its 2025 results released on 22 May showed a statutory operating loss of £305.9m.
This primarily resulted from the downscaling of some of its legacy US operations and delays in US and UK contracts. These in turn were a product of spending reviews in both countries.
Crucially though, analysts forecast that its earnings will increase by a stunning 78% a year to the end of fiscal year 2027/28.
And it is growth here that ultimately powers any firm’s stock price and dividends higher over time.
Key in this regard is the integrated global defence and security company’s growing order book. The 2025 results showed a record 12% year-on-year rise in orders to £1.955bn. At that point it had a funded order backlog of £2.845bn.
However, the firm has since announced an additional £1.54bn five-year contract extension with the UK government. This is for testing and evaluation of military equipment, including missile firings and test pilot training. It brings its total order backlog up to around £5bn as of now.
A risk to its business is a major failure in one of its systems. This could be costly to remedy and could damage its reputation.
A strategic refocusing in progress
That said, the company is currently undertaking a strategic repositioning aimed at reshaping for even greater growth.
This will involve extending elements of the £1.54bn Long-Term Partnering Agreement signed with the UK Ministry of Defence to other NATO countries.
One prime example of this is the UK’s ‘DragonFire’ laser weapon programme, in which QinetiQ is a key partner. Another is the firm’s ‘Tethered Aerostat Radar System’ programme that provides real-time border monitoring and surveillance.
Delivering extra value for shareholders is also a central plank of this plan. To this effect, the firm announced an additional £200m share buyback over two years, to begin in June. These programmes tend to support share price gains.
Are the shares undervalued?
QinetiQ’s price-to-sales ratio of 1.3 looks very undervalued compared to its competitors’ average of 2.3.
These firms comprise Babcock International at 1, BAE Systems at 2.1, Chemring at 2.4, and Rolls-Royce at 3.7.
I ran a discounted cash flow analysis to find out where the shares should be priced, based on future cash flow forecasts for the business.
This shows QintetiQ shares are 46% undervalued at their present price of £5. So their fair value is theoretically £9.26. As I said earlier, I think this is one investors should consider.
