I’ve liked the look of QinetiQ Group (LSE: QQ) for some time now, and I’ve watched without buying while the share price has risen by 40% over the past five years. That’s a period in which the FTSE 250, of which QinetiQ is a member, has risen 22%, and the FTSE 100 has managed just 12%.
On top of that, QinetiQ’s dividends have been yielding around 2.5% on average, so I’ve missed a solid investment there. But hindsight is a poor master, so are QinetiQ shares still worth buying?
Forecast price-to-earnings multiples come in around 14 to 15, close to the Footsie’s long-term average. But that average includes a lot of companies that carry significant debt, and QuinetiQ is not one of them. In fact, at the end of its last financial year at 31 March, QinetiQ reported net cash of £188.5m on its books. For me, that indicates a company that deserves a premium valuation, which we still do not see here.
QinetiQ’s success in securing new contracts is continuing, with a £1.3bn “ground-breaking agreement” signed with the MoD in April, coming after several contract wins coming from the US.
On the US front, the company has just announced an acquisition that’s set to double the size of its US operations. The target is Manufacturing Techniques Inc, to be bought on a cash-free, debt-free basis for $105m, plus an earn-out of up to $20m depending on “delivering stretching financial targets over three years.”
To answer my earlier question, yes, I really do think QinetiQ is still an attractive long-term investment. I might even, finally, act on that thought and buy some myself.
Speaking of overlooked FTSE 250 companies, I’ve been taking a look at Grafton Group (LSE: GFTU), one of the UK’s largest construction supply firms.
We’ve just heard the news from Nationwide that, as of September, UK house price growth has “almost ground to a halt.” That’s not necessarily bad on its own, but if it’s an omen for any kind of decline in the near future, there would surely be fears of a construction slowdown.
But we’re still firmly entrenched in a chronic housing shortage, and public infrastructure projects are very much a long-term driver of the sector.
One question is which companies are likely to prosper at the sharp end of the business, and my answer is that it doesn’t matter if you ignore them and instead buy one of the industry’s ‘picks and shovels’ businesses like Grafton Group. While it’s perhaps literally applicable in this case, the term applies to those firms that provide the intermediate supplies and services that keep a sector going.
On that score, Grafton has been performing very well, seeing its earnings per share almost treble over the past five years, while its share price has gained only around 30%.
That growth spurt is expected to slow, with a couple of relatively flat years on the cards. But the dividend has been progressing well above inflation, and is forecast to continue. Yields are only modest, with 2020’s predictions indicating 2.6%, but we’re looking at cover by earnings of more than 3.3 times.
I rate Grafton as a defensive long-term buy.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.