FTSE 250 stock QinetiQ (LSE: QQ) looks cheap at less than £4. That’s because the defence firm could receive big orders as governments ramp up defence spending.
Nearly all NATO countries are spending more – 28 out of 30 increased their outlay in 2023 and a majority now spend 2% of GDP on defence.
UK defence chief Grant Shapps is even calling for a 2.5% spend while his German counterpart wants 3.5%.
While this is no cause for celebration, it’s probably for the best that countries shore up their borders given the state of the world.
It also means governments will allocate billions for the latest technology to protect themselves and this is where QinetiQ shines.
What does QinetiQ do?
So let’s look at just why the company is so prominent in this area.
One of its latest projects is Dragonfire, a laser-directed energy weapon (LDEW) that zaps hostile drones out of the sky.
Royal Navy warships, RAF planes and British Army armoured vehicles are all in line to be fitted with these protective LDEWs. The lasers are so accurate they can hit a pound coin from a kilometre away.
LDEWs might sound like science fiction – especially with the scifi-style name, and the testing photos do look like CGI – but Dragonfire is in its advanced stages and could be deployed within five years.
And this is just one of hundreds of projects across lasers, robotics and other cutting-edge designs.
There aren’t too many sectors where the UK leads the world today, but state-of-the-art defence engineering as exhibited by QinetiQ is surely one of them.
Okay, the company boasts world-leading technology in an industry on the up. That’s all very well and good, but is it a good stock to consider buying? I think so.
That’s because sales are growing, revenue under contract has increased to 95% and order intake is “excellent”, according to the latest Q3 update.
ESG dilemma
Great results are being driven by customers like the US, UK and Australian governments (which make up 90% of sales). It’s hard to imagine a more stable clientele.
I’m impressed with low debt levels too with net debt/EBITDA standing at just 1.5 times.
What about the ESG issues? Of course, buying QinetiQ stock means making money from the production of weapons. There’s no getting around that.
And if anyone doesn’t feel comfortable investing here, I wouldn’t blame them.
At the same time, many institutional investors have shifted away from such stocks. The result? Cheaper share prices.
QinetiQ trades at 14 times earnings and 13 times forward earnings. For a stock on the up, I’d have to call that attractive.
Am I buying?
So is it a buy for me? Well, I want to buy, but it’s a question of the balance of my portfolio.
I already own a sizeable stake in FTSE 100 defence firm BAE Systems which works with QinetiQ on several projects. If I didn’t own that, I’d buy the shares.
This post was originally published on Motley Fool
