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Every once in a while, a stock comes along that could skyrocket and greatly increase shareholder wealth. Is FTSE 250 headline QinetiQ (LSE: QQ.) one of those stocks?
Let's take a closer look.
Defense business created by the department of defense.
Created in 20021 by the UK Ministry of Defense (MoD), the company tests and evaluates technology for military and civilian use. In 2003, it signed a 25-year agreement with the Ministry of Defense to provide its services. It also offers its services to other companies through its US-based business Avantus.
The stock has performed well over the past 12 months. They have risen 27% from 349p this time last year, to current levels of 444p.
I think a big part of this has to do with the increasing number of conflicts globally today.
To buy or not to buy?
As noted, unfortunate events around the world have caused an increase in defense spending. I must admit that I am an advocate of peace and I hope that all conflicts come to a quick and peaceful resolution. One of the risks here is that if this were to happen, defense spending might not be a priority and QinetiQ's earnings and returns could suffer.
Continuing with the bearish aspects, one of my constant concerns for any product-based business is operational issues. Competition, product failure, and other issues could hurt companies like QinetiQ.
Moving on to the other side of the coin, in my opinion, there are many things I like. First, defense spending is currently at all-time highs, according to research giant Statista. This could be good news for the profits of defense companies, including QinetiQ.
Next, QinetiQ's connections with the Ministry of Defense are a major plus point. Having such close connections to the government could bode well for profits and performance, and this could translate into consistent returns for years to come.
Related to this, QinetiQ's 2024 report released two weeks ago was a good read. Revenue, underlying profit, earnings per share and its order book all increased significantly, to name a few highlights.
Lastly, the stock appears to be good value for money with a P/E ratio of just 18. This is much lower compared to the average peer group ratio of close to 38. Additionally, a dividend yield close to 2% could continue to increase. grow in line with the business. However, I understand that dividends are never guaranteed.
my verdict
QinetiQ could benefit from continued defense spending. I'm not worried about conflict resolution hurting business, since defense spending covers much more than weapons.
Additionally, the company's close ties to the government, as well as the attractive valuation and passive income opportunity make it look like a great opportunity today.
It could play a vital role as part of my holdings to generate greater wealth. I don't think it can create generational wealth on its own, but it's definitely still a good stock to buy for me. I would be willing to buy some shares next time I can.
