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On Tuesday, Kepler Cheuvreux downgraded Qinetiq Group (LON:QQ:LN) (OTC: QNTQY) stock rating from Buy to Hold and reduced the price target to GBP4.36 from GBP5.32. The stock has already felt the impact, dropping over 20% in the past week, though InvestingPro analysis suggests the company remains undervalued at current levels. The decision follows a profit warning from the defense company, prompting the research firm to revise its adjusted earnings per share (EPS) estimates for the fiscal years 2025-26. Kepler Cheuvreux now anticipates a lower adjusted EPS of approximately 25.9 pence for 2025 and 33.2 pence for 2026, marking a reduction of 18% and 10%, respectively. Despite these revisions, InvestingPro data shows the company maintains a perfect Piotroski Score of 9, indicating strong financial health, with revenue growing at 10.36% over the last twelve months.
According to Kepler Cheuvreux, Qinetiq Group is expected to return to its organic growth trend of 7-9% at incremental margin in the second half of fiscal 2026. Additionally, the company has announced a GBP200 million share buyback program over two years, which is intended to partially offset the negative impact on net earnings before interest and taxes (EBIT) and adjusted EPS.
The downgraded rating and price target reflect the increased volatility in the defense budgets of the United States and the United Kingdom (TADAWUL:4280), which have proven to be more uncertain than previously anticipated. This uncertainty is a key factor in the firm’s reassessment of Qinetiq’s stock value.
Kepler Cheuvreux has set the new price target at 436 pence, which corresponds to 13 times the forward price-to-earnings (P/E) ratio. This is a significant decrease from the former target P/E ratio of 16 times, which the firm considered to be a fair value. The research firm’s revised outlook suggests a cautious stance towards Qinetiq Group’s stock amid the current uncertainties in the defense sector. InvestingPro subscribers have access to 8 additional ProTips and comprehensive financial metrics that could help evaluate this investment opportunity more thoroughly.
In other recent news, Deutsche Bank (ETR:DBKGn) has adjusted its price target for QinetiQ Group to GBP5.20 from GBP5.70, while maintaining a Buy rating. This revision is due to near-term trading challenges stemming from delays in contract awards in the UK Intelligence and US Sectors. These delays are influenced by geopolitical uncertainties and tighter export controls, which have impacted QinetiQ’s typically strong fourth-quarter sales. Despite these setbacks, QinetiQ’s management views the disruptions as temporary and highlights the strong performance of its UK Defence business, which relies on long-term contracts. Both the UK and US are undergoing policy changes that have disrupted contract flows, with ongoing assessments of spending priorities and efficiencies. The UK government plans to increase defense spending to 2.5% of GDP by 2027, although specifics are still under discussion. The anticipated Strategic Defence Review in 2025 is expected to provide more clarity on future defense spending, potentially benefiting QinetiQ. The company continues to navigate these challenges with an eye toward stabilizing its operations as conditions improve.
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