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3 Mid-Cap UK Defense Shares to Consider Buying in 2024

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As geopolitical tensions rise in Europe and the Middle East, UK shares in the defense industry are on my radar.

Growing threats to Europe have increased defense budgets. UK companies big and small are stepping up to provide weapons, intelligence and cyber defense technology. It is common knowledge that BAE Systems And Rolls Royce have performed well recently, but they are not the UK’s only defense stocks.

I examine three lesser-known defensive stocks worth watching in 2024.

Babcock International

Babcock International (LSE:BAB) provides global engineering support and product development for land, marine, nuclear and aerospace applications. It also builds and decommissions nuclear facilities in the UK, including submarines. As the owner and manager of two UK naval bases, it is well established in the defense sector, providing naval and military support to Ukraine.

With an acceptable balance sheet, I would keep an eye on his debt. With over £1bn of debt in 2023 and just £354m of equity, it has a high debt-to-equity ratio of 2.67. The share price has risen 72% this year but fell sharply during the Covid crisis and is still down 20% since early 2020.

I believe the price has good upside potential from here as it is a reliable stock with strong ties to the global defense industry.

Serco Group

Serco Group (LSE:SRP) is involved in defence, immigration, transport and justice in the UK and mainland Europe, with additional operations in the Middle East, Australia, Hong Kong and North America. As a designer and producer of key defense assets, it plays a key role in European defense operations. It also provides engineering, infrastructure support and training to military personnel.

In its 2023 full-year report, revenue rose 7.5% and earnings per share (EPS) rose 36%, beating analysts’ expectations. At £1.84, the share price is estimated to trade at a fair value compared to peers and the industry.

So why did employees Nigel Crossley and Mark Irwin collectively sell £920k worth of shares last week? Possibly because revenue is forecast to fall in the coming years due to government efforts to reduce spending on asylum seekers, along with the renewal of the five-year Medicare contract.

Next, the forward price-to-earnings (P/E) ratio is 13.5 (up from 9.9), potentially limiting future price upside. Still, the general consensus among analysts is that the price will increase by about 20 percent in the coming year.

QinetiQ

QinetiQ (LSE:QQ.) develops advanced technology to support military operations. Some of its services include AI, cybersecurity, naval control systems, radar enhancement, robotics, and missile detection.

The share price has fallen significantly recently, down 4.5 percent in the past year, with profit margins halving. In the first-half 2024 earnings report, EPS missed analysts’ expectations by 7.6%. With a heavy reliance on government defense spending, any shortfall threatens QinetiQ’s profitability — especially considering the highly specialized, advanced nature of its products.

But with revenue and earnings rising, value has lagged behind. After that, QinetiQ shares could sell cheap at £3.52. Future cash flow analysis estimates the fair value to be higher in the range of £6.50. This is supported by a 12-month price target consensus from eight analysts at around £4.33 – a 23% increase.


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