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My BAE Systems (LSE: BA.) shares have soared. But now I’m switching my attention to a FTSE 250 stock in the defence sector that may have more scope for growth.
This isn’t to slight BAE. Its shares are up 55% over the last 12 months and an incredible 270% across five years. The FTSE 100 defence and aerospace giant has thrived as global tensions escalate.
The group’s Q1 results, released on 30 July, were strong with sales climbing 11% to £14.6bn and full-year guidance upgraded. The order intake slipped slightly, but the backlog remains enormous at £75.4bn, which gives plenty of visibility.
It’s not cheap though. BAE Systems trades on a price-to-earnings ratio of 28.6. That reflects the strength of its investment case, but also leaves little room for disappointment if results soften. I already hold BAE shares in my Self–Invested Personal Pension (SIPP), but won’t buy more at these levels.
Babcock still soaring too
Another FTSE 100 defence stock, Babcock International Group (LSE: BAB), has also been on a tear. Full-year results, published on 25 June, showed revenue rising 10% to £4.83bn with operating profit leaping 34% to £362.9m. Its contract backlog stands at £10.4bn, and management treated investors to a £200m share buyback.
Babcock builds Type-31 frigates, among other weaponry, and was lifted further on 1 September when Norway unveiled a £10bn order for UK-built warships, with similar moves expected from Denmark and Sweden.
The Babcock share price has even beaten BAE. It’s surged 155% over 12 months and 480% across five years.
Again, a toppy P/E of 23.5 suggests the big gains may already have been made. With a market-cap of £6bn, it’s turning into a heavyweight.
QinetiQ Group offers room to grow
That brings me to FTSE 250-listed QinetiQ Group (LSE: QQ), which specialising in high-tech defence kit such as weapons sensors, robotic systems, cyber defences and port security. With a market-cap of £2.75bn, it’s a relative minnow, but that also gives it room to grow.
Performance has been less than spectacular than the other two. The QinetiQ share price is up just under 14% in a year and 90% over five.
On 17 July, management reiterated full-year 2025 targets of about 3% organic revenue growth, 11% margins, and 15%-20% earnings per share growth.
QinetiQ recently signed a £1.5bn five-year extension to its long-term partnering agreement with the UK government, along with £110m of contracts in intelligence, plus US Navy and Air Force deals. It also boasts a record order backlog, currently around £5bn.
Top defensive investment?
The valuation looks reasonable too. Its P/E of 19.4 is cheaper than BAE or Babcock. My fellow Fool writer Simon Watkins has noted that QinetiQ also looks undervalued on a price-to-book basis. It stands at 4.1, against BAE Systems at 4.8 and Babcock at 8.4.
Yet analysts aren’t expecting fireworks. The consensus one-year share price target at 551.5p, suggesting an 8.3% uplift from today’s 509p.
There are risks. Any serious fault in its systems could hit earnings and reputation. And easing geopolitical tensions could dampen demand.
I already hold BAE and I’ve been wary of chasing Babcock higher after its blistering rally. QinetiQ looks more reasonably priced. I think investors might consider buying at today’s level.
