The invasion of Ukraine by Russia in February 2022 transformed the geopolitical landscape for the worse. And the Israel-Hamas war is at risk of spreading out into the wider Middle East. In response, global defence budgets look set to rise even higher, potentially benefiting some FTSE defence stocks.
Here are three shares that investors might want to consider for 2024.
BAE Systems
First up is BAE Systems (LSE: BA.), an obvious choice as the UK’s largest defence contractor. The stock has surged around 70% since February 2022 and was the best-performer in the FTSE 100 last year.
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BAE has a global customer base and its sales are incredibly well-diversified. It sells munitions, electronic warfare systems, submarines, tanks, cyber products and aircraft.
It’s part of a consortium that makes the Eurofighter Typhoon jet and is a tier-one supplier on the US’s F-35 Lightning fighter jet programme.
At the end of June, the firm’s order backlog stood at a record £66.2bn.
Now, one thing I’d highlight here is that the stock’s strong performance has pushed the price-to-earnings (P/E) ratio up to 17.7. That’s a premium valuation to the wider market. It could pull back sharply if hoped-for ceasefires emerge in Ukraine and/or the Middle East.
However, most analysts are expecting defence budgets to remain elevated due to ongoing geopolitical tensions between the US and China. And that should benefit BAE.
QinetiQ Group
Next, we have FTSE 250-listed QinetiQ Group (LSE: QQ). This £2bn company provides technology and services to both governments and commercial clients.
It’s known for its military robots, notably TALON, an unmanned robot used in Iraq and Afghanistan to disable improvised explosive devices.
The share price has risen 30% since Russia’s invasion of Ukraine, although it’s down around 4% this year.
This is despite a strong Q2, during which it improved its organic growth and profit margins. It also increased its order backlog, securing a record first-half order intake of approximately £950m.
Revenue growth has been solid, rising from £883 in 2018 to an expected £1.8bn this year (FY24). Net profit has been lumpy in that time though, which is a risk here. But it has still trended higher, with analysts forecasting £160m in bottom-line profit this year, around 3.8% higher than last year.
Meanwhile, the stock looks cheap on a P/E ratio of 12.8.
Chemring Group
Finally, there’s Chemring Group (LSE: CHG). This FTSE 250 defence company is the smallest here, with a market cap of £833m.
Chemring’s electronic warfare products are used to deceive radar, sonar and other detection systems. An example would be military aircraft using such devices to fool ground-to-air missiles.
Today (10 November), the firm said that its full-year performance was in line with expectations. It achieved a solid operating cash conversion rate of 90% of EBITDA. This enabled it to fund growth initiatives, increase dividends by 20% and put £9m towards its £50m share buyback programme.
On a negative note, it said its explosive hazard detection business will be discontinued, resulting in a non-cash impairment of £31m. It’s also restructuring its US Sensors business, which creates uncertainty.
The share price is flat so far in 2023. It could head higher though, if management can capitalise on the rising tide of global defence spending.
