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3 Defence Darlings Poised To Explode: QinetiQ Group plc, BAE Systems plc And Meggitt plc

Today I am looking at three arms builders which could take pride of place in any investor’s shares portfolio.

QinetiQ Group

Shares in defence giant QinetiQ (LSE: QQ) have endured a torrid time after chief executive Leo Quinn announced his resignation back in October. The architect of the company’s revival was always going to be a hard act to follow, and subsequent worries over the future direction of QinetiQ have caused prices to slip 13% lower since then.

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But news today that the business has appointed Steve Wadey as CEO should come as a huge relief to investors. The new man is currently managing director of missiles systems specialists MBDA UK, as well as co-chairperson of the Defence Growth Partnership, and subsequently brings a wealth of experience to the role.

Indeed, analysts at Edison commented that “the announcement should provide clarity for investors and ease lingering doubts about the sustainability of performance, adding that “we feel this is a promising appointment of a CEO from the industry, who knows QinetiQ well and will already have a clear view of how to further drive the group’s organic plus strategy.”

The City’s number crunchers expect previous budgetary constraints from key customers, as well as subsequent lumpiness in contract timings, to drive earnings at the defence giant 12% lower for the year ending March 2015. But Wadley’s administration is expected to oversee a return to the black thereafter, with expansion of 6% and 3% pencilled in for 2016 and 2017 correspondingly amid easing sales pressures.

As a result, QinetiQ’s already-peachy P/E multiple of 13.1 times forward earnings for this year falls to an excellent 12.3 times for 2016 and 12.1 times the following year. Any reading below 15 times is generally considered attractive value for money.

BAE Systems

Like QinetiQ, I believe that BAE Systems (LSE: BA) is poised to benefit from improving economic conditions in its core US and UK markets, territories in which the business enjoys top-tier supplier status. On top of this, the London-based firm is also reaping the rewards of expansion into new markets, and of the £7.9bn worth of group orders clocked up in January-August last year, £2.6bn of this total came from non-Western clients.

BAE Systems is also putting its formidable cash pile to good use by continuing to hoover up companies in hot growth sectors and underpin future earnings expansion. Just last month the business forked out $28m to buy intelligence, surveillance and reconnaissance specialists Eclipse Electronic Systems, and finalised the $232.5m purchase of commercial cyber services firm SilverSky.

Broker forecasts suggest that BAE Systems will recover from a 12% earnings decline in 2014 with solid rebounds of 6% and 5% in 2015 and 2016 correspondingly. As a result BAE Systems deals on hugely-appealing earnings multiples of 12.8 times and 12.4 times for these years.

Furthermore, BAE Systems is also a terrific selection for those seeking reliable year-on-year dividend expansion. The business is predicted to raise the total payout from 20.4p per share in 2014 to 21p this year, culminating in a huge 4% yield. And an additional payment hike in 2016, to 21.7p, drives this readout to an impressive 4.2%.

Meggitt

As well as having solid exposure to the defence sector, Meggitt (LSE: MGGT) is a major player in the commercial aerospace arena, a lucrative growth area as air traffic across the globe continues to surge.

Meggitt currently sources around 48% of total sales from the civil aeroplane market, and supplies a wide array of critical components to the world’s largest planebuilders like Airbus and Boeing. As well, the company’s aftermarket service has enjoyed surging demand in recent years, and a backcloth of falling oil prices and rising airline profits promises to keep sales here heading northwards.

Forecasters expect Meggitt to bounce back from an expected 16% earnings dive next year with a 16% recovery in 2015, in turn creating an eye-catching P/E multiple of 14.7 times. And predictions of an additional 8% rise in 2016 pushes the earnings multiple to an even better 13.4 times.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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