BAE Systems‘ shares have done well recently amid the volatile geopolitical backdrop. Over the last year, they’ve risen about 65%. Investors could have done better in a smaller, lesser-known UK defence stock, however. Over the last year, this stock’s jumped about 90%.
A British defence stock flying under the radar
The one I want to highlight today is Filtronic (LSE: FTC). It specialises in the design and manufacture of mission-critical communication networks.
As I write this, it’s trading for 184p. So a £1,000 investment would buy 543 shares (ignoring trading commissions).
Exposure to the space and defence markets
In recent years, Filtronic has had a lot of success selling cutting-edge wireless communication components to Elon Musk’s space company SpaceX. Last year, for example, it secured a contract with the space powerhouse worth a whopping $62.5m.
However, it’s now starting to see success in the defence space too. In December, for instance, it announced it had won a £7m contract with an unnamed European defence prime contractor to supply high-performance active components for a long-standing electronic sensor programme.
“This latest win deepens our engagement with a key European defence customer and strengthens Filtronic’s position in the defence sector, a growing market for the group,” said CEO Nat Edington at the time.
“As we invest in capability and capacity, Filtronic is increasingly well positioned to support long-term demand for advanced radio frequency solutions in the defence market,” he added.
Another defence deal worth highlighting was a £13.4m contract awarded in July last year. This was for the supply of high-performance modules for an electronic sensor system.
Worth a look today?
Is this stock worth considering for an investment portfolio today? I think so.
It’s not cheap. Currently, the forward-looking price-to-earnings (P/E) ratio is about 50. But I don’t see the high earnings multiple as a dealbreaker. Because this company’s operating in two fast-growing markets (defence and space) and it’s growing at a rapid rate.
This financial year (ending 31 May), revenue’s expected to hit £55m. That compares to £16.3m three years earlier (annualised growth of around 50%).
Significant long-term potential
Of course, there are no guarantees the company’s revenues will continue to soar. And one risk to be aware of with this stock is the fact that revenues tend to be lumpy.
So Filtronic could experience a period of lower growth, unsettling some investors and leading to share price volatility.
Customer concentration risk is another issue to think about. Recently, a lot of the company’s revenue has been coming from SpaceX.
If an investor’s willing to take a five-year-plus view though (our preferred investment horizon here at The Motley Fool), I think this stock could do really well. With a strong balance sheet, a growing pipeline, and exposure to two big growth markets, the company looks well placed for success and is one to consider.
