FTSE-listed firms in this sector continue to flourish, in prime position to win long-term, stable, and lucrative, contracts from the MoD and armed forces around the world. 

BAE

BAE (LSE:BA.) engineers build the aft fuselage for the next-gen F-35 fighter jet, and alongside working on the UK’s Dreadnought nuclear submarines, also repair US Navy ships. BAE won a $171m maintenance contract for the latter in September 2019. Its electronic systems division won a $2.7bn contract the same month to build laser-guided APKWS rockets with sales planned to Lebanon, the Netherlands, Australia and Tunisia.

BAE shares come with a healthy 3.8% dividend and are priced relatively cheaply for a company this size, with a trailing P/E ratio of just 13. This is one for long-term income investors, with dividends per share rising steadily since 2014, always with cover of 1.8 times earnings or more.

A November 2019 trading update showed earnings per share growing in the mid-single digit percent range, with BAE targeting £3bn of free cash flow between now and 2021. Despite the low-interest-rate environment putting pressure on pensions, I think an investment in BAE is a solid long-term play.

Meggitt

The return of Meggitt (LSE:MGGT) to the FTSE 100 in 2019 came after a four-year hiatus. Those interim years were particularly tough for the components manufacturer and while revenues were rising, profits were going nowhere fast.

Meggitt has benefitted from the astronomical increase in US military spending under President Trump. CEO Tony Wood’s decision to ramp up the Bournemouth-based firm’s American operations has been reflected in the share price.

November 2019 brought the good news of a six-year $130m contract win with the US Defence Logistics Agency to supply fuel tanks to the F/A-18 Super Hornet, the V-22 Osprey and the Super Stallion helicopter. Margins have been hit by Boeing’s catastrophic handling of the 737Max, for which Meggitt makes the engine fire detector system, but the manufacturer still upgraded 2019’s revenue guidance given a particularly strong performance across the year.

TP Group

£51m market cap firm TP Group (LSE:TPG) is much smaller than any of the other defence specialists on this list. Changing its name from Corac in 2015 reflected a switch from research to engineering, and the company now focuses on its space, intelligence and maritime divisions.

In September 2019, it won a £1m MoD contract to upgrade Royal Navy submarines with 750 oxygen generators, following on from a February contract win to furnish the fleet with life-saving lithium hydroxide curtains.

TP Group’s balance sheet is looking the healthiest it has in years. Cash at bank hit £22m in 2019, with earnings per share ticking over into the black for the first time in five years as revenues rose accordingly. Adjusted earnings were up 85% between 2017 and 2018, with order books hitting £48.3m. If this momentum continues, I’d expect the share price to rocket forward in the next three to five years.

Industry analyst Coindesk suggests its 24% drop over the past 10 days started with a series of highly leveraged contract positions being liquidated on the Bitmex cryptocurrency exchange.

Those left holding the bag might urge you to buy the dip. Happily, there are other ways to capitalise on growth industries. Instead I’d look at companies with rising prospects whose managements are making strong decisions that could mean even faster growth and rapid share price appreciation.

Sub optimal

I think investors seeking early entry into high-growth stocks should consider TP Group (LSE:TPG). At a market cap of £51m it’s one of the smallest firms on my watchlist.

On 17 September the AIM-listed firm announced a new order worth £1m from the Ministry of Defence (MoD) to supply 750 oxygen generators to upgrade Royal Navy submarines.

CEO Phil Cartmell said: “We are very pleased to see a further significant order materialise from our long-standing agreement framework with the MoD,” as he suggested the latest sale “highlights the enduring value of these arrangements“.

I would definitely agree. Government contracts are a lucrative place for young companies to find growth as they represent reliable sources of income over the long term.

TP was awarded a £22m contract in May 2017 to provide atmosphere equipment for Royal Navy submarines and in February 2019 also won an MoD contract to supply lithium hydroxide curtains across the fleet to help manage carbon dioxide contamination.

Institutions make up 73% of TP Group shareholders, which suggests professional investors regard the company as one which can offer a good return.

In fact, the investment management arms of FTSE 100 giants Legal & General and Hargreaves Lansdown both own significant slices in the company, with 11.9% and 4.3% respectively.

The company hasn’t posted any operating profits in the last five years, which may come as some concern. But if you dig into the numbers, operating losses have narrowed every year, from £3.93m in 2014 to £30,000 in 2018, as revenue has jumped from £21.6m to £39m over the same period.

And in year-end results to 31 December 2018, TP announced it had turned those £39m in sales into its first after-tax profits of £170,000.

Head in the clouds

Cloud computing provider Nasstar (LSE:NASA) is another high growth stock I think has significant potential.

The £64m market cap firm is a minnow compared to the high dividend, multi-billion pound companies I usually favour, but that means there’s much more opportunity to get a market-beating return on investment.

A chart of its share price over the last five years shows positive growth with very few blips and after-tax profits are very close to turning positive, with revenues up every year for the last five years.

Half-year results posted on 30 September add to this positive growth outlook. Revenues are up 2% year on year to £12.8m and operating profit for the six months to 30 June 2019 was £0.5m, compared to a £0.3m loss for the first half of 2018.

CEO Nigel Redwood has my confidence because he is investing in the right things: improving automation to cut costs and to deliver better customer support.

Monthly revenues from a new three-year contract with an as-yet-unnamed top 50 UK law firm will begin to be realised in the second half of the year and into the first half of 2020.

Specifically, TP reported that based on current trading it expects full-year earnings before interest tax depreciation and amortisation to “significantly exceed current market expectations” and 2017 EBITDA is now expected to be “materially ahead of current market expectations”. Generally speaking, if management uses terminology such as “materially” and “significantly” the figures are more than 20% above (or below) current expectations. 

As well as TP’s better-than-expected trading, management also expects the group’s year-end cash position to now exceed expectations. 

For the full-year, City analysts were expecting the company to report a pre-tax loss of £0.5m but it now looks as if the group might on track to report its first pre-tax profit in nearly a decade. For 2017 analysts had pencilled-in a pre-tax profit of £0.7m on revenues of £25m. 

A record year

Today’s trading update from TP rounds off what has been a great year for the company. The company, which manufactures carbon dioxide removal equipment for submarines, heat exchangers and fabrication components, has won a number of significant contracts with large customers this year, including the Ministry of Defence, BAE Systems and most recently GE Oil & Gas. It’s these contracts that have helped power revenue and earnings above expectations for the year.  

Nonetheless, TP is still trying to recover from past mistakes. The shares remain 93% below their 2008 high of 86p and for the past seven years, the company has struggled to make a profit. 

In comparison, TP’s larger peer Cohort (LSE: CHRT) has nearly doubled revenue and grown pre-tax profits by 240% since 2012. 

Restructuring 

TP’s problems have stemmed from its exposure to the energy industry, which management has been working to diversify away from in recent years. The diversification plan seems to be working but as a defence/technology play, Cohort still looks to be the better option. 

Indeed, while Cohort generates tens of millions in revenue from defence contracts every year, the company also works with bodies such as Transport for London. The group recently signed a deal with TfL for £7m to help develop digital traffic management systems. Cohort’s earnings per share have grown by an average of 25% per year since 2012 and while City analysts have pencilled-in a modest earnings decline this year, next year growth is expected to resume. 

For 2017 the City is expecting Cohort to report earnings per share growth of 15%. 

A look at valuation 

When it comes to valuation, Cohort also looks to be a much more attractive buy than TP. At present shares in Cohort are trading at a forward P/E of 16.3 and support a dividend yield of 1.7%. 

Shares in TP trade at a forward P/E of over 100, but this is based on current forecasts. When the City has had time to digest today’s trading update from the company, its valuation may drop significantly as earnings projections are revised higher. 

Shares in specialist technology and engineering company TP Group (LSE: TPG) have risen by over 10% today, after the company continues to enjoy improved investor sentiment following its recent trading update.

With the company reporting just last week that it continued to make good progress in the final quarter of 2015, it now expects results for the full-year to be ahead of expectations. In fact, it anticipates achieving a key target for the year through being breakeven at the adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) level, which would be encouraging progress for the business.

TP Group’s share price is also benefitting from news that two of its directors yesterday purchased around 500,000 shares in the company between them. And with TP Group stating in its results that it has a strong pipeline of opportunities, providing good visibility for the business this year, investor sentiment could continue to pick up following the 30% rise in its share price in the year-to-date.

Clearly, TP Group is a small company and is therefore relatively high risk. However, it could be worth a closer look for less risk-averse investors.

Financially sound

Also rising by over 10% today is Victoria Oil & Gas (LSE: VOG). Like TP Group, it recently reported an upbeat set of results, with the Africa-focused company delivering a 73% increase in production in the final quarter of the year versus the comparable quarter of the previous year. Furthermore, Victoria Oil & Gas continues to be relatively unaffected by the slide in the oil price, reporting that it has had a minimal impact on its Gaz du Cameroun business in terms of gas price changes or customers changing back to oil.

In addition, the company reported that it has been able to maintain customers at their contracted prices and with a net cash position of $5.9m, it could prove to be relatively financially sound during a tough period for the wider industry. However, although the stock may be of interest to less risk-averse investors, with a number of other oil and gas plays being priced to sell, there may be more enticing companies to buy elsewhere within the sector.

Exceptionally volatile

Meanwhile, shares in investment company Concha (LSE: CHA) have risen by around 13% today, despite there being no news flow released in recent days. Of course, the last few weeks have been exceptionally volatile for the company’s share price, with it having fallen by 24% since the turn of the year. In fact, investor sentiment has been weak since the release of the company’s annual accounts which showed that Concha had made a loss of £628,000 for the year.

With Concha seeking new investment opportunities, it could successfully position itself for long term growth. But realistically, with only one investment at the present time, there appear to be better options available.