Ultra Electronics stock predictions : Gloom pervades the global defence sector because major players such as the US and UK are going to rein in spending over the next few years. But Questor thinks the sector de-rating has been overdone – especially for the smaller players in the specialist technology space.
One such player is Ultra Electronics. The FTSE 250 niche player specialises in electronics and software for the defence, security, transport and energy markets. The company was formed by a management buy-out of the Dowty Group's defence and aerospace businesses in 1993.
The business has expanded by acquisition and today consists of 24 businesses operating in over 150 niche specialist capability areas. These niche areas can be split into six broad categories: battlespace IT; sonar systems; civil transport and energy equipment; specialist equipment for defence and security applications; and systems for civil and military aircraft.
One of the growing areas in which the company operates is the so-called C4ISR – which stands for command, control, communications, computers, intelligence, surveillance and reconnaissance. It is also involved in anti-submarine electronics, also a growth area.
More than half of the group's revenues comes from the US. With 27pc in the UK, 9pc from mainland Europe and 11pc from the growth markets of the Middle East and Asia.
About 18pc of its total business is in sonar systems and 40pc in battlespace IT. Civil aircraft equipment accounts for 7pc of revenues and military aircraft 10pc. Equipment not related to the military accounts for 13pc of the group.
As an investor, you will be familiar with the phrase "past performance is no guide to future returns" that forms part of the legal disclaimers included in marketing and advertising around funds and other investments.
There is some truth to this – but only a little. If someone or something has a great track record in an area of business, it should inspire confidence about their performance in the future.
The past financial performance of Ultra Electronics is not only worthy of note, it is impressive. Over the last five years the group has shown a compounded annual growth rate (CAGR) in earnings per share of 16pc.
The total shareholder return, which includes share price rise and dividend payments, has a CAGR of 17pc since the company listed in 1996. In the current year, earnings per share are forecast to rise 11pc, with pre-tax profits up 23pc.
The group's balance sheet is robust, with net cash – so more bolt-on acquisitions are likely. The group has a track record of making sensible strategic purchases work.
The shares are yielding 2.3pc trading on a December 2011 earnings multiple of 14, falling to 13.2 next year. Questor thinks that this rating is too low and the shares deserve to trade at a higher multiple. Once investors realise that the defence sector has not fallen off a cliff a re-rating should be in prospect.
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