To me, Chemring (LSE: CHG) looks one of the best FTSE 250 defence stocks to buy right now. It is a specialist in high‑specification, low‑competition areas, with elevated margins reflecting this.
The US — its largest single customer — expects to spend around 3.5% of gross domestic product (GDP) on defence in 2026 and the following years. And other NATO members have pledged to lift their combined defence budgets to 5% of GDP by 2035, up from around 2% last year. It is an increase worth roughly $423bn (£314bn) a year.
As a result, Chemring is strengthening its order visibility, expanding its margins, and setting its earnings up to move much higher. But the market appears not to have factored all these elements into the price as yet.
So, how much could investors potentially make from the price-to-value gap here?
Where’s the growth coming from?
Chemring’s crown jewel is its countermeasures business, which produces the flares, chaff, and advanced decoys that protect military aircraft from missile threats.
Demand here is rising as geopolitical tensions intensify and Western air forces return to operating in contested airspace. The Pentagon and non-US NATO are now in the middle of a multi‑year effort to replenish and upgrade their stockpiles.
Chemring’s second main business pillar is Sensors & Energetics, covering explosive‑detection systems, chemical, and biological threat sensors, and specialist explosives.
This side of the group sits squarely in areas where governments are increasing investment in intelligence, detection, and protective infrastructure. And Chemring is perfectly positioned to benefit from long‑term spending trends here.
A risk to the firm would be any supply‑chain disruption in its highly specialised manufacturing. Another would be any core failure in any of its key products, which could prove costly to fix.
That said, the consensus of analyst forecasts is that the company’s earnings will grow by a very robust 13.2% a year over the medium term. And it is ultimately this that powers any stock price higher over the long run.
Low multiples, higher fair value
Chemring looks undervalued against its competitors on several key stock measures, including the price-to-earnings benchmark. Its 27.9 ratio is second lowest in the group, which averages 34.3. These firms are Northrup Grumman at 23.7, BAE Systems at 33.3, RTX at 38.9, and L3Harris Technologies at 41.2.
To nail down what this means for its fair value, I ran a discounted cash flow (DCF) analysis. This identifies where any stock ‘should’ trade by projecting future cash flows for the underlying business and discounting them back to today.
Analysts’ DCF modelling varies — some more bullish than mine, others more cautious — depending on the variables used. Nevertheless, based on my DCF assumptions — including an 8.9% discount rate — Chemring shares are 26% undervalued at their current £5.45 price. This implies a fair value of around £7.36.
Share prices tend to converge to their fair value over time, so this suggests a potentially terrific buying opportunity to consider today if those DCF assumptions hold.
My investment view
I already hold two stocks in the defence sector — BAE Systems and Rolls-Royce — so adding another would unsettle the risk/reward balance of my portfolio.
But for investors without this concern, Chemring looks an intriguing opportunity to consider.
