Among the greatest winners this yr have been defence shares. Babcock Worldwide and BAE Techniques are main the cost, up 130% and 65% respectively. However Chemring from the FTSE 250 has additionally rocketed 75% thus far in 2025.

One other mid-cap inventory doing nicely is Serco (LSE: SRP). Up 31% yr up to now, it’s now at an 11-year excessive!

Defence increase

Serco’s a authorities outsourcing specialist with fingers in lots of pies (transport, justice, immigration, hospitals, and extra). However defence is the agency’s largest sector, now contributing round 40% of income. It does issues like handle military bases, present assist for the Royal Navy, and run army coaching centres.

Yesterday (26 June), Serco launched a stronger-than-expected replace for the primary six months of the yr. Income is anticipated to tick up 2% yr on yr, whereas underlying working revenue shall be no less than £140m, with a “continued strong margin” of round 5.9%.

Order consumption was sturdy, with round £3bn of contract awards, and a excessive weighting of these from the defence sector. The corporate additionally snapped up MT&S, Northrop Grumman’s mission coaching and satellite tv for pc floor community communications software program enterprise.

This $327m acquisition enhances Serco’s presence within the booming North American and international defence markets. With rising army budgets, this might show to be a canny buy. It’s anticipated to ship income of round £130m this yr.

Trying forward, Serco lifted full-year income steerage from £4.8bn to £4.9bn, boosted by higher-than-anticipated exercise ranges within the immigration sector. It expects underlying working revenue of £260m.  

Two considerations

The inventory seems to be pretty valued at 12 occasions ahead earnings. There’s additionally a well-supported 2.3% forecast dividend yield too.

Nonetheless, I’ve a few considerations that put me off right here. First, the corporate’s forecast progress charges aren’t that prime. The Metropolis sees income rising from £4.8bn in 2024 to £5.2bn in 2027. That’s a compound annual progress price of about 2.7%.

In an period when each defence and immigration companies are tipped for robust demand, I discover that somewhat uninspiring. Then once more, earnings are anticipated to develop 8% in 2025 and 2026, so the inventory may simply maintain chugging increased.

My second situation is that immigration companies are a double-edged sword. On the one hand, Serco has huge expertise housing and transporting asylum seekers, in addition to operating detention centres. These contracts present regular money flows.

The structural drivers for immigration and migration are clear, from local weather change to geopolitical uncertainty, there shall be and possibly stay for a lot of a long time to return, excessive ranges of migration in sure components of the world.

Serco CEO Anthony Kirby, 2024 earnings name.

Alternatively, there’s the danger of reputational harm if allegations of mistreatment or poor situations hit the headlines. That would jeopardise contract renewals and harm investor sentiment.

Ought to I purchase Serco inventory?

Weighing issues up, I’m not going so as to add the inventory to my portfolio. I’m pleased with my present publicity to the defence business. However this could be a FTSE 250 inventory to think about for many who don’t need to spend money on arms producers.

Serco’s gaining publicity to rising international defence spending, which is likely one of the hottest tendencies out there at the moment, so the inventory may have additional to run.