Defence stocks have risen in value in recent years following Russia’s invasion of Ukraine, the conflict in Gaza and, most recently, US President Donald Trump’s declaration that Washington might not come to the aid of Nato members whose defence spending is too low.
Trump’s view is that security budgets should be at least 5 per cent of GDP. In the face of these threats, the UK and the EU have committed to spending billions more on weapons and their armed forces, and companies such as Rheinmetall, Thales, BAE Systems, Leonardo and Saab have all risen in value, climbing particularly steeply this year.
Investors expect higher spending commitments to translate into new arms orders and upgrades. As contracts are signed, there could be more share price momentum. But big, long-term contracts can bring cost and obsolescence risks; orders might not materialise and many of these companies will be impacted by Trump’s tariffs. Still, investors have plenty of options, in every tier of the market, with varying degrees of exposure to the defence sector.
Besides the highly rated FTSE 100 brigade, which includes BAE, Babcock — which maintains Britain’s nuclear submarines — and Rolls-Royce, smaller players include security technology and testing specialist Qinetiq, defence engineer Chemring (both in the FTSE 250), and on London’s junior market, defence technology group Cohort, Filtronic and Concurrent, which supplies businesses and the military with equipment and components to enable systems to operate seamlessly in the most inhospitable of environments.
Investors need to keep a cool head when share prices get carried away on momentum and to pay attention to companies’ underlying strengths. But geopolitical tensions and higher defence spending seem unlikely to fade soon, meaning these companies should have reasonable growth runways ahead of them.
BUY: Concurrent Technologies (CNC)
Strong growth could be affected by tariff disruption, writes Arthur Sants.
Concurrent Technologies makes robust computers used in military planes and ships. These are small computer boards that can power radar systems or communication gear and can endure extreme heat or vibrations.
The recent surge in defence spending has driven strong growth. In the year to December, Concurrent’s revenue increased by 27 per cent to £40.3mn while its cash profit (Ebitda) was up 30 per cent to £7.8mn.
It secured 22 design wins across all regions, this included 10 “major wins” as well as its largest ever contract to date with a “major” US defence contractor. This large deal is set to contribute materially from 2027.
However, the US tariffs and the general hostile rhetoric from US President Donald Trump towards Europe are a concern. Last year, the US made up 45 per cent of Concurrent’s revenue, with Germany making up 9 per cent and the UK 7 per cent, with other European countries contributing 20 per cent. The recent multibillion dollar spending plan from Germany should boost growth. However, it might come at the expense of US business which could switch towards more domestic suppliers.
Management says trading this year has started well and £100mn is a “meaningful future milestone”. This growth will be accelerated in 2026 when revenue from the big contract win comes through. Concurrent trades on a forward price/earnings ratio of 25, which is expensive, but given its growth rate and balance sheet strength, it doesn’t look exorbitant. Tariffs will be a problem, but in the long run increased defence spending will be a more important macro factor. And its strong balance sheet will mean it is braced for tricky days ahead.
BUY: AB Dynamics (ABDP)
The company is well placed on the tariff front compared with European competitors, writes Christopher Akers.
AB Dynamics got off to a robust start with its latest medium-term growth plan as revenue rose by double digits and operating profit increased by a fifth in its first half.
Top-line progress was made across all three of the Aim-traded automotive testing company’s divisions. Sales were up 7 per cent at its biggest unit, testing products, thanks to growth in driving robots and the September acquisition of German automotive power electronics testing solutions business Bolab Systems.
The smaller testing services and simulation units grew more rapidly. Testing services delivered sales growth of 21 per cent ahead of new US regulatory requirements, while sales in the simulation arm were up 15 per cent due to improved motion platform sales. The company also flagged two contract wins for the second half.
Adjusted operating profit was up 21 per cent and the margin improved by 160 basis points to 18.6 per cent. The gross margin uplift was even better, moving up 190 basis points to 60.2 per cent. Gains from supply chain improvements and a new enterprise resource planning (ERP) system were clear.
AB Dynamics set out a medium-term growth strategy in November, with the aim of doubling revenue and tripling operating profit through organic growth of 10 per cent a year in core markets, and increasing the operating margin to 20 per cent.
The company generated 30 per cent of revenue in North America in the half, and so investors might feel concerned about tariffs. However, chief executive James Routh argued that the direct impact from the announced levies “is likely to be limited” and management expects to deliver annual adjusted operating profit in line with analyst consensus of £22.4mn.
Panmure Liberum analyst Sanjay Vidyarthi pointed out that the company is relatively well placed compared with competitors such as 4 active and VI-grade, which manufacture in Europe, given it sells products to the US from the UK, which has a lower 10 per cent tariff rate. Europe’s tariff rate is 20 per cent, albeit this was halved for 90 days as part of President Donald Trump’s April 9 climbdown.
The order book sat at £42.1mn at February 28, just ahead of the same point last year and an improvement from £30.3mn last August.
AB Dynamics trades on 22 times forward earnings for 2026. In our view, that will ultimately prove attractive if it can deliver on medium-term hopes. We see potential for upgrades in the second half.
HOLD: J Sainsbury (SBRY)
The supermarket business delivers strong profit growth, but the catalogue shops arm struggles, writes Michael Fahy.
Maybe it was the Easter weekend approaching, but as chief executive Simon Roberts presented J Sainsbury results he sounded more like he was delivering a sermon than an analysis of its performance.
The retailer had “reinvigorated our passion for food”, he argued, discussing a business that has been “transformed”.
To be fair, the numbers did point to something of a resurrection. Sainsbury’s share of the grocery market by volume rose to 12.8 per cent, up from 12.2 per cent two years earlier. This has been helped by improving customer perceptions around quality and price, with more customers choosing to do their main weekly shop at the retailer, Roberts said.
Sales grew by 4.1 per cent which, when accompanied by £350mn of cost improvements, translated into underlying operating profit growth of more than 15 per cent — more than double the 7.2 per cent recorded across the sector. This boosted its return on capital by 70 basis points to 9 per cent.
However, when the weaker performance of the Argos business — whose sales fell by 2.7 per cent and profits virtually collapsed — is factored in, the group’s retail operating profit growth was bang in line with peers.
Although Argos improved sequentially over the course of last year to record sales growth of 1.9 per cent in the final quarter, it had to shift a lot of stock at a discount to do so and management does not expect much improvement in this business this year. Indeed, the group-wide outlook is for underlying operating profit to remain flat at around £1bn as it factors in the prospect of a much more competitive grocery market.
As yet, there isn’t much evidence of a price war and after “investing £1bn in lowering our prices” over the past four years Sainsbury’s is in a decent position to defend share gains, Roberts argued.
Competition concerns pushed Sainsbury’s shares down by 8 per cent this year, but the muted guidance meant house broker Shore Capital cut its earnings forecast by a similar amount. A dividend yield north of 5 per cent and the prospect of £450mn of further returns through buybacks and a special dividend once the sale of Sainsbury’s Bank completes are appealing, but with the shares fairly rated at 11.4 times forecast earnings we’re not yet ready to be converted.
