Defence stocks are some of the hottest in Europe right now as government’s ramp-up military spending in response to developments in Ukraine.
Donald Trump’s push for European nations to take more responsibility for security has driven up shares in the likes of BAE Systems, Thales and Leonardo.
In the UK, Prime Minister Sir Keir Starmer has pledged to increase defence spending to 2.5 per cent of GDP from 2027, with an ambition to reach three per cent in the next parliament.
The recent share price surge follows a long-running boom in the sector. Contractors have profited not only from Russia’s invasion of Ukraine, but also conflict in the Middle East and China-Taiwan tensions.
Given the backdrop, a profit warning would be the last thing investors would expect. However, Farnborough-based Qinetiq on Monday slashed guidance and announced plans to re-structure its US business, prompting shares to plummet more than 20 per cent by mid-morning.
Its warning impacted shares in other UK defence firms, with Chemring and Cohort falling around three per cent and 1.5 per cent respectively.
Whilst Qinetiq’s warning stemmed partly from internal issues, it also points to several possible hurdles for the sector.
“It’s a reminder to investors that even the sectors with strong earnings growth opportunities aren’t immune to bumps in the road,” Russ Mould, investment director at AJ Bell, said.
Governments in Europe and the US are under significant pressure to slash costs and improve efficiency, placing potential contract awards under more heightened scrutiny. The US Defense Department is in the process of laying off thousands of staff amid wider government cuts.
“The UK and US, in particular, are undergoing reviews of spending, and that’s likely to have caused delays on new spending, creating headwinds for Qinetiq,” Mould explained.
Contract delays were a key part of the Farnborough-based firm’s warning on Monday and have been significant enough to prompt a restructuring of its entire US business.
Procurement is already a particularly contentious issue in the UK, with parliament’s Defence Committee warning last year of a “broken” system hampered by bureaucracy and poor accountability.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said Qinetiq had been “beset with contract delays, not just for its US arm, but also its UK intelligence business.”
Even news of a £200m extension to its share buyback programme was not enough to prevent the sell-off on Monday.
Overall, analysts are clear that the wider defence boom is set to continue. Orders at FTSE 100 giants Rolls-Royce and BAE Systems are surging, and the wider push from Europe to increase defence spending will see more contracts dished out despite the delays.