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In my experience, the FTSE 250‘s a great place to go shopping for growth shares. Games Workshop‘s just one stock from the index that’s made me a lot of money. It’s now trading on the FTSE 100.
In my quest to find the next stock market winners, I’ve come across the following high-power business. Here’s why it’s worth serious consideration, in my view.
Robust returns
Defence companies have proved to be be among the best-performing growth stocks following the pandemic. Russia’s invasion of Ukraine in early 2022 first sparked the sector rally, as NATO countries bolstered their defence budgets after years of underinvestment.
Since then, conflict in the Middle East and growing concerns over Chinese expansionism have given defence shares an added boost.
FTSE 250-quoted QinetiQ (LSE:QQ.) is one company that’s thriving in the current climate. Latest financials showed its order backlog at record highs of £5bn as of June.
Driven mainly by strong share price gains, the business has delivered an a total average annual return of 15% since 2020. That trumps the UK mid-cap index’s 8% return over the same period.
QinetiQ provides a wide range of products and services to governments across the globe. Roughly 70% of revenues are sourced from its home market, where it has strong relationships with the Ministry of Defence (MoD). The firm’s other two main markets are the US and Australia.
Cyber opportunity
As I say, QinetiQ’s expertise spans a range of applications across air, sea and land. Its operations include manufacturing target systems, supplying robots and training combat staff. This gives it many ways to capitalise on rising defence budgets, and reduces reliance on one area to drive earnings.
What I also like about the company is its expertise in the field of cyber security, something that many other defence shares don’t offer. This is a rapidly growing segment as online attacks from individuals, groups and state actors become increasingly common.
Latest data from the UK’s National Cyber Security Centre (NCSC) showed “a 50% increase in highly significant incidents” over the last year. These comprise attacks that impact the central government, essential services, large numbers of the domestic population, or the national economy.
Against this backdrop, QinetiQ sealed £110m worth of contracts with the MoD between April and June. It’s already a major supplier to the MoD’s multi-year, £1.2bn new Digital and IT Professional Services (DIPS) framework.
Sustained growth
A bright outlook for defence spending means City analysts expect QinetiQ to deliver sustained double-digit earnings growth over the next few years. Ambitious cost-cutting and US restructuring is also tipped to give the bottom line an extra jolt.
| Financial Year To March… | Earnings Per Share | Annual Growth |
|---|---|---|
| 2026 | 30.78p | 18% |
| 2027 | 34.81p | 13% |
| 2028 | 38.27p | 10% |
Naturally, there are dangers to these forecasts. The defence sector’s highly competitive, and further contract wins are never guaranteed. An uncertain outlook for US defence spending is something else investors must consider. QinetiQ sources almost a fifth of revenues from the States.
Yet I think this FTSE 250 growth stock has what it takes to thrive in what is on balance an extremely favourable trading landscape. What’s more, with a price-to-earnings growth (PEG) ratio of 0.9, QinetiQ shares look undervalued to me and worth considering.
