The dangers of China and Russia make this defense company a must-have

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In addition to revenue growth, QinetiQ expects an improvement in margins in the medium term. The latest quarterly trading update, published on July 21, was in line with previous company guidance and reaffirmed expectations of a one percentage point increase in operating margin.

Meanwhile, strong operating cash flow, resulting in an average cash conversion rate of 163 percent over the past two years, further improves the company’s competitive position.

It offers scope for generous capital expenditures that are expected to be at the top of previous guidance in the current fiscal year. The low-asset business model means greater agility that further supports the ability to invest in new technology to disrupt incumbent operators.

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Of course, government plans to increase defense spending depend on their affordability. The outlook for the global economy has deteriorated sharply in recent months, as factors such as high inflation and rising interest rates have led to more subdued growth forecasts.

However, according to Questor, the geopolitical environment has changed so much in recent months that military spending growth could essentially be held back.

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The recent rise in QinetiQ’s share price means it is now yielding just 1.9 percent. Despite the fact that dividends have risen 10 percent year-on-year over the past decade, low yields mean that investment attractiveness is focused on the potential for capital appreciation rather than income.

Trading at 16 times expected earnings, the stock is also much more expensive now than it was at the time of our first look at the stock in 2017. Then the company traded at a low prospective rating of 13. However, the financial outlook has improved significantly since then. moment.

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Rising defense budgets are now a clear catalyst for earnings growth that warrants a higher valuation. With a solid balance sheet, international growth opportunities and future margin improvements, it remains a worthwhile purchase for long-term investors.

Questor says: buy

Ticker: QQ

Share price at closing: 380.8p

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