BAE Systems’ share price has had a fantastic run recently. Fuelled by the global boom in defence spending, it has risen about 40% over the last year and around 130% over the last three.
The thing is though, some are some lesser-known UK defence shares that have absolutely smashed the FTSE 100 big-hitter. Here’s a look at two such stocks.
Contracts with the US Navy
First up, we have MS International (LSE: MSI). It’s a small British engineering company that operates in a few industries including defence.
It’s having a lot of success in the defence space at the moment. For example, in early October, the company announced that it had won a $34.5m contract with the US Navy to supply stabilised gun mounts.
Meanwhile, in the year to the end of April, the company delivered naval weapons systems for both the US and Germany. It also fulfilled various orders from the Middle East for its VSHORAD land-based counter drone weapons systems.
Given this success, the company’s share price is on fire. Over one year it’s up about 50% while over three it’s up about 400% (about three times the share price return of BAE Systems).
Is the stock worth a look today? I think so – it’s not expensive.
Currently, it trades on a trailing price-to-earnings (P/E) ratio of 18. That strikes me as a very reasonable valuation given the company’s growth (revenue has climbed from £62m to £118m in the last four financial years).
Of course, a risk is a slowdown in contract wins. This could put pressure on the share price.
With NATO countries set to ramp up their spending on defence in the years ahead though, I see a lot of potential here.
Moving from space to defence
The other stock I want to highlight is Filtronic (LSE: FTC). It’s a technology company that specialises in wireless communications technologies.
This company has had a lot of success selling products to SpaceX in recent years. However, it’s now branching out into the defence market (and having success here too).
For example, last year it announced a £4m contract with BAE Maritime Services (a subsidiary of BAE Systems) to design and develop monolithic microwave integrated circuits (MMICs). These are chips designed for extremely fast wireless signals.
More recently, in July this year, it announced that it had won a £13.4m contract with a leading European defence company. This is to supply high-performance modules for an electronic sensor system.
Zooming in on the share price here, it has had an amazing run. Over one year, it’s up 70% and over three it’s up 970% (about 7.5 times the return of BAE Systems).
Is this growth stock worth considering for a portfolio? I believe so.
It’s higher up on the risk scale as it has a lofty valuation (the P/E ratio is about 42) and there’s no guarantee that contract wins will keep coming in. But taking a five-year view, I see a lot of potential.
And so do a few of my colleagues…
