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Demand for defense stocks has taken off since the Russian invasion of Ukraine in early 2021. FTSE 100 heavyweight bae systems, For example, its share price has soared more than 90% since then.
It's easy to see why BAE Systems in particular is a market favorite. Its extensive market-leading product portfolio gives it top-tier status among leading Western militaries, which in turn provides it with exceptional opportunities to increase its profits. The company's record backlog of £66.2bn as of June underlines just how hot demand is for its services.
Project execution issues are a constant threat that could affect profits here. But overall things are looking pretty good for the defense giant as global arms budgets increase.
BAE Systems stock has been on my watch list for a long time. However, the latest trade news from FTSE 250 business Chemring Group (LSE:CHG) suggest this could also be a great way to get exposure to the defense sector.
Save orders
Chemring is a world leader in the field of countermeasures, a market in which it has a share of more than 50%. We're talking about flares and chaff that planes and ships fire to launch radar-guided and heat-seeking missiles.
The company also manufactures sensors and is an expert in cybersecurity and electronic warfare. And like BAE Systems, sales of its entire product range are soaring.
During the financial year to October 2023, Chemring secured a record £756.4 million in new orders, it said today. This was a 37% year-on-year increase and took the company's closure backlog to £921.6 million, the highest level in a decade.
Revenue rose 18% from the 2022 financial year to £472.6m, while underlying pre-tax profit soared 17% to £67.9m. This encouraged the company to increase the annual dividend by 21% to 6.9 pence per share.
Brilliant Future
But can Chemring stock maintain this momentum? Considering its strong market position and the changing geopolitical landscape, I think the answer is yes.
CEO Michael Ord commented that “The outlook for global defense markets is becoming stronger with continued growth expected over the next decade.”. I agree with him.
Russia's war in Eastern Europe, China's optimistic comments on Taiwan and the South China Sea, and growing conflict in the Middle East are stoking fears of a new geopolitical alignment.
Both Moscow and Beijing are overstretching their defense budgets, meaning Chemring's customers should follow suit and continue building their own arsenals. The company also intends to expand to meet growing demand for its products, spending £120 million to increase capacity and consequently annual sales by £85 million a year from 2026/2027.
Good value
Today, Chemring stock trades on a forward price-to-earnings (P/E) ratio of 16.2 times. As an added advantage, it has a dividend yield of 2.4%.
I believe this offers excellent value given the company's proven track record of execution and encouraging business outlook. I expect profits here to rise steadily despite the threat of supply chain disruptions.
