FTSE 100 defence giants BAE Systems and Rolls-Royce are rocketing right now, and so are their medium-sized FTSE 250 counterparts.
Investors know why, unless they’ve been avoiding the news altogether. I wouldn’t blame them if they had.
Geopolitics may be deteriorating but my portfolio’s thriving, with BAE and Rolls up over 30% in the last month. FTSE 250 defence tech firm Chemring Group (LSE: CHG) isn’t far behind.
Its shares are up 25% over the month, including a 7.3% jump yesterday (3 March), as markets digested the tense exchange between President Trump and Ukrainian President Zelensky on Friday (28 February).
The Chemring share price is red hot
European NATO members are now considering increasing defence spending to 3% or even 3.5% of GDP. This bodes well for companies like Chemring, which specialise in military tech and services.
Yet the Chemring share price was rising even before that, thanks to a $1.39bn takeover bid by US firm Bain Capital. While such news excites investors, I’m always cautious with takeovers, as shares can tumble if deals collapse.
I’m especially wary now, with speculation that PM Sir Keir Starmer might block foreign takeovers of UK defence firms, even from the US, on national security grounds. If he does –and Trump won’t like it – Chemring’s share price could lose some heat.
That’s less of a concern with my blue-chip defence stocks. No foreign concern is buying them (I hope). Still, an investor who put £10,000 into Chemring a month ago will be pleased. Their investment’s now worth £12,500, and given global tensions, there may be more to come.
In December, Chemring reported an 8% rise in revenues to £510m, though pre-tax profits dipped 2% to £66m. Its order book hit a record £1.037bn, indicating strong demand.
Investors are getting a share buyback too
Last month, Chemring reported that its order book had climbed again, to a record £1.35bn by 30 January. Q1 orders totalled £393m, thanks to “significant” contract wins. CEO Michael Ord cited “strong customer demand and confidence” and announced a £40m share buyback.
Over the past year, Chemring shares have risen just 13%, suggesting they were idling before the recent surge. BAE Systems was similar. My take? Defence stocks were overvalued, and investors held back. Until the Trump-Zelensky stand-off.
Over five years, Chemring shares have gained 60%, showing steady growth. Analysts remain positive, setting a median one-year target of 466p. That implies a 16% rise from current levels. However, these forecasts are likely to have predated the Zelensky shock and NATO response, so could now be higher.
Chemring looks worth considering. But if geopolitical tensions ease, the sector could cool. Even a vaguely acceptable Ukraine peace deal might dent its momentum. And a few words from Trump could send the stock anywhere.
I was also concerned to see that operating margins recently dipped from 14.6% to 13.9%, following problems at Chemring’s Tennessee site.
Investors should brace themselves for volatility. Could US procurement of UK defence equipment fall if Starmer and Trump clash? That could possibly impact the firm.
Yet I think Chemring’s well worth considering in the days ahead. But with my BAE and Rolls-Royce holdings, I already have enough exposure to the sector.
This post was originally published on Motley Fool
