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FTSE 250 high-tech defence systems firm QinetiQ (LSE: QQ) is down 18% from its 6 June £5.78 traded high.
Much of this decline has followed announcements of various peace talks connected to the Russia-Ukraine war. The markets appear to believe that these may lead to a lasting resolution of the conflict.
Whether this transpires or not, I believe in the old military adage that the best way to ensure peace is to prepare for conflict.
So apparently does NATO. At June’s 2025 Summit, members agreed to increase their annual defence spending to 5% of gross domestic product by 2035. Last year, the average was just 2%.
How’s the business been doing?
QinetiQ’s 2025 results released on 22 May showed a statutory loss after tax of £185.7m. This compares to a £139.6m post tax profit in 2024.
However, this was largely caused by a £305.9m loss from the one-off downscaling of its older US operations.
Otherwise, its revenue rose to £1.931.6bn, from £1.912bn a year earlier. And it saw a record order intake of £1.954.8bn – up 12% year on year.
Positively as well, its 17 July H1 trading update saw it announce a five-year, £1.5bn extension to its Long-Term Partnering Agreement with the UK government. It also highlighted the awarding of £110m worth of contracts from the UK’s Intelligence Sector.
On 26 June, it announced a $7.7m (£5.7m) contract from the US Defense Logistics Agency. This is to supply survivability solutions for the US Air Force’s C-5 Galaxy aircraft fleet.
On 29 July, it was also awarded a $26m US Navy defence contract with General Dynamics for next-generation submarine systems. And on 4 August it signed a £25m contract to deliver an immersive training environment for the UK’s Royal Navy.
A risk to QinetiQ’s earnings – which is what powers any firm’s share price over time – is a major fault in any of its products. This could be costly to fix in the short term and do longer-term damage to its reputation.
However, consensus analysts’ forecasts are that its earnings will increase by a spectacular 67.3% a year to the end of fiscal year 2027/28.
How does the share price valuation look?
Looking first at QinetiQ’s key valuations compared to its competitors shows it is undervalued on the price-to-book measure. It is joint bottom of the group at a ratio of 4.1 compared to its peers’ average of 13.7.
These firms comprise Chemring at 4.1, BAE Systems at 4.8, Babcock International at 8.4, and Rolls-Royce at 37.3.
It is also undervalued on the price-to-sales ratio – at 1.3 compared to the 2.6 average of its competitors.
A discounted cash flow analysis shows where any firm’s stock price should be, based on cash flow forecasts for the underlying business. In QinetiQ’s case, it shows the shares are 51% undervalued at their current £4.75 price.
Therefore, their fair value is £9.69.
Will I buy the shares?
I already own two stocks in the same sector – BAE Systems, and Rolls-Royce – so owning another would unbalance my portfolio.
However, for those investors without this problem, I think QinetiQ is very well worth considering.
This story originally appeared on Motley Fool
