On Monday (17 March), the share price of QinetiQ Group (LSE:QQ.), the FTSE 250 defence contractor, slumped practically 21% after it issued a revenue warning. Beforehand, it was predicting “high single digit organic revenue growth” for the yr ending 31 March (FY25). Now, it’s anticipating 2%.

To attempt to soften the blow for shareholders, the corporate unveiled an “extension to our share buyback programme of up to £200m over the next two years”. Following the announcement, this cash will go loads additional. However I think it’s small consolation for buyers.

Sturdy development

Like many within the sector, the group’s grown lately. Evaluating FY24 with FY20, income practically doubled and underlying earnings per share elevated by 47%. Consequently, since March 2020, its share price has risen over 40%.

Nevertheless, it now seems as if this fast development has stalled. And at first look, this doesn’t make sense. Just lately, there have been many bulletins from European nations promising to spend extra on their armies, navies and air forces.

Final month, the UK pledged to extend spending to 2.5% of Gross Home Product, with impact from April 2027. Yesterday (18 March), Germany’s parliament voted to exempt army spending from its strict debt guidelines. And the European Union has introduced plans that would see up to €800bn spent within the sector over the following 4 years.

But in opposition to this apparently optimistic backdrop, QinetiQ has issued a dark buying and selling replace. Might this be a warning for different defence shares, whose share costs have completed so effectively currently?

Troubled instances

I’ve lengthy thought that President Trump’s insistence that NATO members spend extra on defence is a double-edged sword. As a part of his ‘America First’ coverage, he needs to cease subsidising the safety of different nations. This implies america will finish up spending much less.

Nevertheless, given the current share price rallies of many within the sector, I think this hasn’t been factored in. Certainly, QinetiQ’s blaming lots of its present issues on America. On account of a restructuring within the nation, the group expects to take a £140m hit to its backside line. Monday’s press release additionally referred to “challenging US market conditions”.

Nevertheless, it’s essential to notice that there’s at all times a time lag with defence contracts. It takes a number of years for the procurement course of to conclude. With all investments it’s essential to take a long-term view however, in my view, that is significantly good recommendation with regards to defence shares.

This might clarify why QinetiQ stays optimistic. It says: “Longer term, the underlying strength of the Group coupled with the relevance of our mission critical capabilities to the national security needs of our customers in the UK, US and Australia as well as NATO allies, positions us well for long term future growth”.

Nevertheless, I don’t need to spend money on QinetiQ or the defence sector for the time being. There’s an excessive amount of uncertainty for my liking. And usually talking, for my part, valuations are on the excessive facet.   

It’s additionally essential to acknowledge that, on moral grounds, some are reluctant to purchase into the sector. Having a smaller pool of potential buyers may weigh on share costs over the long run.

For these causes, I’m going to look elsewhere for my subsequent funding.