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Shares in FTSE 250 defence firm QinetiQ (LSE: QQ) are down 19% from their 6 June 12-month traded high of £5.78.
I think much of this reflects ongoing market uncertainty arising from the firm’s 17 March trading update. This highlighted delays in short-term contracts in its UK Intelligence sector and its Global Solutions business (primarily in the US).
At that point, QinetiQ revised its full fiscal year 2025/26 organic revenue growth forecast down to 2%, with an underlying margin of around 10%. These figures also included the effect of £25m–£30m in one-off charges.
Before this, it had projected high single-digit organic revenue growth and an underlying margin above 12%.
Adding recent bearish pressure on the stock was the downgrading of the stock to Hold from Buy by broker Kepler Cheuvreux. The short-term risks cited were the same as those earlier highlighted by QinetiQ. However, the brokerage added that the stock is likely to recover in H2.
Longer-term outlook
I regard the full standard investment cycle as 30 years. This would cover starting to invest around the age of 20 and looking to retire around the age of 50.
Given this, as a long-term investor (after several years as a senior investment bank trader), I always loved short-term risks. They often meant the ability to pick up fundamentally solid stocks on the cheap that would recover relatively quickly and perform strongly over time.
In QinetiQ’s case, the business fundamentals look very sound to me — and to other analysts.
The consensus forecast is that the firm’s earnings will increase by a whopping 67.4% annually to end-fiscal year 2027/28. And it is growth here that powers any firm’s stock price over the long term.
What’s the price-to-valuation gap?
In my experience, asset prices tend to converge to their ‘fair value’ over time. This value reflects several business fundamentals, including earnings growth. And this is reflected in cash flow forecasts for any firm.
The best way I have found to ascertain any stock’s fair value is the discounted cash flow method. This highlights where any share price should be, based on cash flow forecasts for the underlying business.
In QinetiQ’s case, it shows the shares are 43% undervalued at their current £4.70 price. Therefore, their fair value is £8.25.
Secondary confirmations from comparisons of key stock measures with its peers confirm this undervaluation.
For example, on the key price-to-sales ratio, it trades joint bottom of its competitor group at only 1.2. These companies comprise Babcock at 1.2, BAE Systems at 2.1, Chemring at 2.9, and Rolls-Royce at 4.9.
My investment view
Given these factors, I believe QinetiQ is a short-term risk/long-term reward play.
However, I already own two other stocks in the defence sector – BAE Systems, and Rolls-Royce. Adding another would unsettle the overall balance of my portfolio.
So if I wanted to buy QinetiQ then I would have to sell one of these two. However, both have been performing extremely well, and I do not want to tinker with that.
For other investors though, I think the firm is well worth considering.
This story originally appeared on Motley Fool
