Down 16% since August, this FTSE 250 security company looks cheap to me at anywhere under £8.04

FTSE 250 defense company QinetiQ (LSE: QQ) is down 16% since 1 August-12 months trading at £4.90. However, it is still up 25% since January 16th one year ago trading below £3.29. It also jumped 65% from its opening price on 24 February 2022 – the day Russia invaded Ukraine.

In my opinion, the decline since August is not supported by recent results. I also think it is based on the false assumption that global security will improve in Donald Trump’s second presidency.

As a result, now seems like a good opportunity to consider the stock for those investors who deserve it for their portfolio.

A false premise

It is true that Trump said he could end the Russia-Ukraine war in one day. It is also true that Israel’s actions against Iranian proxies have reduced hostility in the Middle East.

However, it remains the case that the Russia-Ukraine war continues. And Syria seems to be the new center of attention for other conflicts in the Middle East, in my opinion.

Additionally, European NATO members are increasing their defense spending to 2%+ of GDP. The shortfall in meeting this target over the last 30 years is estimated at €1.8trn (£1.5trn).

On December 2, UK defense minister John Healey said the government will outline its plan to increase defense spending to 2.5% of GDP this spring.

A strong core business

QinetiQ seems to me to be well positioned to benefit from such a capital increase. It was created by the UK Ministry of Defense (MoD) when it split the Defense Intelligence and Research Agency. Since then, it has become a world leader in the testing, integration and protection of critical military equipment platforms and systems.

Its interim results for H1 2025 released on 14 November saw revenue rise 7.2% year-on-year – to £946.8m. Operating profit rose 6.5% to £106.6m, and earnings per share rose 6% to 14.2p. In addition the best for me was total cash flow from operations which increased by 83% (to £130.9m) while total debt decreased by 30% (to £190.9m). Orders during the period jumped 8.7% to £1.0348bn.

The danger here is that the increase in the cost of planned protection is reduced for some reason. That said, analysts forecast QinetiQ’s earnings to grow by 15.19% annually through the end of 2027. And it’s this growth that ultimately powers the company’s price (and profits) high.

How undervalued is the stock?

The company trades at a price-to-earnings ratio of just 16.3 compared to an average of 28.2 for its peers. So it seems very cheap on this basis.

The same is true for the price-to-book ratio, where it trades at just 2.4 compared to a peer ratio of 3.1. It also applies to the sales price ratio, QinetiQ is at 1.1 against the 1.7 average of its competitors.

To figure out what all this means in terms of price I used a discounted cash flow analysis. Using other analysts’ calculations and my own, this shows that the stock is 49% undervalued at its current price of £4.10.

Therefore, its fair value is technically £8.04, although the vagaries of the market may make it lower or higher than that.

Should I buy the stock?

I already own a defensive stock (BAE Systems), so having one allows me to balance my portfolio.

If I didn’t have it, I would see QinetiQ as a good buy at the current level and I would buy it soon.