The FTSE 250’s Chemring Group (LSE: CHG) provides advanced technology products and services to the aerospace, defence and security markets.
Given escalating security tensions in the Middle East, Europe, and Asia, I believe it looks set for continued strong earnings growth.
And this is ultimately what drives a firm’s share price (and dividend) higher over time.
A bulging order book
Chemring’s 17 October trading update for Q3 showed orders rising 5.6% in the year to date to £638m. Its total order book to that point stood at £1.1bn – up 27% from Q3 2023.
A week earlier on 10 October, the Norwegian government announced a feasibility study for a new military explosives production facility in partnership with subsidiary Chemring Nobel. If approved it could significantly boost the group’s explosive materials supply business.
Aside from this, Chemring’s major businesses are Sensors & Information, and Countermeasures & Energetics.
The former includes chemical and biological threat detection, improvised explosive device detection, and a full range of electronic warfare capabilities.
The latter comprises advanced countermeasures for protecting air and sea platforms against the growing threat of guided missiles. Aside from its extensive military client base here, it has civilian customers including NASA and SpaceX.
A principal risk for Chemring is any major failure in one of its products. This could be expensive to remedy and could damage its reputation.
That said, consensus analysts’ estimates are that its earnings will grow by a stunning 23.1% each year to end-2026.
Are the shares undervalued?
My starting point in determining this is to look at key stock pricing measurements, beginning with the price-to-earnings ratio (P/E). On this, Chemring currently trades at 32.5 compared to an average of 37 for its main competitors. So it is cheap on this basis.
The same is true of another major measure I use – the price-to-book ratio (P/B). Chemring presently trades on this at 2.9 against its competitors’ average of 3.7.
To nail down what this means in cash terms, I ran a discounted cash flow (DCF) analysis. This shows Chemring shares to be 45% undervalued at their current share price of £3.71.
Therefore, a fair value for the stock is £6.75. It may go lower or higher than this, of course, given the vagaries of the market. However, it underlines to me how much of a bargain the shares look.
Will I buy the stock?
There are two reasons why the stock is not for me, despite my view that it could be the next big thing in the defence sector.
I have owned another stock in the same sector (BAE Systems) for years, bought at a much lower price. Having two defence stocks right now would unbalance the risk/reward profile of my overall portfolio.
Also, since I turned 50, I have mainly focused on shares generating yields of over 7%. I aim to increasingly live off these while reducing my working commitments.
However, I think it could be a suitable choice to consider for someone earlier in their investing journey, such as my son.
For him, Chemring offers exceptional earnings growth prospects in the coming years. This should in turn drive the share price higher. It should also power the yield up over time.
The post Hidden away (for now) in the FTSE 250, is this growth stock the next big thing in the defence sector? appeared first on The Motley Fool UK.
5 Shares for the Future of Energy
Investors who don’t own energy shares need to see this now.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.
While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.
Open this new report — 5 Shares for the Future of Energy — and discover:
Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
How to potentially get paid by the weather
Electric Vehicles’ secret backdoor opportunity
One dead simple stock for the new nuclear boom
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
Grab your FREE Energy recommendation now
More reading
As UK payouts slump, here’s a super-safe dividend share I’d buy!
Down 5%, BAE Systems’ share price looks a bargain to me as big orders keep rolling in
These top passive income stocks all go ex-dividend in October!
Here’s the growth forecast for BAE Systems shares through to 2026!
2 UK stocks offering explosive dividend growth
Simon Watkins has positions in BAE Systems. The Motley Fool UK has recommended BAE Systems. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
