FTSE 250 defence agency QinetiQ (LSE: QQ) is down 16% from its 1 August 12-month traded excessive of £4.90. Nonetheless, it’s nonetheless up 25% from its 16 January one-year traded low of £3.29. And it has jumped 65% from its opening price on 24 February 2022 — the day Russia invaded Ukraine.

For my part, the drop since August is unsupported by latest outcomes. I additionally assume it’s primarily based on the false assumption that international safety will enhance in Donald Trump’s second presidency.

Consequently, now appears to be like like a terrific alternative to think about the inventory for these buyers whose portfolio it fits.

A false premise

It’s true Trump has mentioned he can finish the Russia-Ukraine conflict in a day. It’s also true that Israeli actions towards Iran’s proxies have decreased Center East hostilities.

Nonetheless, it stays the case that the Russia-Ukraine conflict continues. And Syria appears to be like to be a possible new focus for additional Center Jap battle, for my part.

Moreover, European NATO members are rising their defence spending to 2%+ of GDP. The shortfall in assembly this goal over the previous 30 years is estimated at €1.8trn (£1.5trn).

On 2 December, UK defence minister John Healey mentioned the federal government will define its plan to extend defence spending to 2.5% of GDP this spring.

A powerful core enterprise

QinetiQ appears to be like to me to be in a terrific place to learn from such spending will increase. It was fashioned by the UK’s Ministry of Defence (MoD) when it break up its Defence Analysis and Analysis Company. Since then, it has turn into a world chief within the analysis, integration and securing of army mission-critical platforms and techniques.

Its interim H1 2025 outcomes launched on 14 November noticed income up 7.2% yr on yr – to £946.8m. Working revenue elevated 6.5% to £106.6m, and earnings per share rose 6% to 14.2p. Moreover extremely constructive for me was internet money move from operations hovering 83% (to £130.9m) whereas internet debt tumbled 30% (to £190.9m). Orders over the interval jumped 8.7% to £1.0348bn.

A threat right here is that deliberate defence spending will increase are decreased for some purpose. That mentioned, analysts forecast that QinetiQ’s earnings will improve 15.19% yearly to end-2027. And it’s this development that in the end powers an organization’s share price (and dividend) greater.

How undervalued is the inventory?

The agency trades at a price-to-earnings ratio of simply 16.3 towards a mean 28.2 for its competitor group. So it appears to be like very low-cost on this foundation.

The identical is true on the price-to-book ratio, on which it trades at solely 2.4 in comparison with a peer common of three.1. And it additionally applies to the price-to-sales ratio, with QinetiQ at 1.1 towards a 1.7 common for its opponents.

To determine what all this implies in share price phrases I ran a reduced money move analysis. Utilizing different analysts’ figures and my very own, this reveals the inventory is 49% undervalued at its current £4.10 price.

Subsequently, its truthful worth is technically £8.04, though market vagaries would possibly transfer it decrease or greater than that.

Will I purchase the inventory?

I already personal a defence inventory (BAE Programs), so having one other would unbalance my portfolio.

If I didn’t have it, I’d see QinetiQ as a terrific purchase on the present degree and would buy it quickly.