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At FTSE 100 outperformed FTSE 250 by a wide margin last year. The UK blue-chip index ended the year slightly higher, while the mid-cap index fell almost 20%. This was the worst performance since 2008.
As such, I have turned my attention to mid-sized companies in the FTSE 250 that can offer high growth opportunities. And one defensive stock has caught my eye.
Deception and protection
Chemring Group (LSE: CHG) creates advanced technology solutions for defence, security and law enforcement agencies. It also sells to commercial markets such as medical, transportation and space (customers include NASA and SpaceX). These products can be found in more than 50 countries.
The company is divided into two main parts. The first is Countermeasures and Energetics, which are made from products used to fool radar, sonar and other detection systems. For example, military aircraft use these devices to deceive surface-to-air missiles. This division also sells aircraft safety components, such as oxygen masks and ejector seats for the airframe.
The Sensors and Information segment provides products for detecting biological and chemical weapons, as well as software and solutions for electronic warfare. As a result of the Russian invasion of Ukraine, the company sees many opportunities for electronic warfare products in the international market.
Business momentum
For the fiscal year ending 31 October 2022, group profits rose 13% year-on-year to £442.8m. Underlying pre-tax profit rose 12% to £62.5m.
Chemring’s order book is growing, due to growing geopolitical tensions. A 30% increase year on year, and now stands at £650.9m.
The company also managed to reduce its net debt by 73% over the period, to just £7.2m.
Finally, the dividend increased by 19% to 5.7p per share. Today, the dividend yield on SA shares is currently 2.3%.
Optimism and risk
The outlook from management is understandably bullish. It says: “Chemring is well placed, with a strong strategy, a market leading position in various geographies and sectors, and with critical products and services for governments and blue-chip customers around the world. The long-term outlook remains strong.”
One risk to point out is customer concentration. More than 50% of the group’s sales are in the US, while the UK accounts for around 30% of its revenue. Any cuts to the military budget here or in the US over the next few years could impact the company’s growth trajectory. That said, the company is diversified across many sectors in both countries.
In addition, the stock will stop if Russia and Ukraine enter into peace negotiations. Unfortunately, this does not appear in the short term.
Beat the FTSE 250
The stock is up 3% for the year, but is actually down 21% since May. Over five years, the stock is up 58%, excluding dividends. That’s better than the FTSE 250, which has fallen 6% over the same period.
Chemring’s current market capitalization is £812m, with each share worth 286p. That gives the stock a price-to-earnings ratio (P/E) of about 17. The price-to-sales ratio (P/S) is 1.8. There is no price tag to indicate that the price is expensive.
Overall, I am quite encouraged to start a position as soon as I have capital available.
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