For the sake of balance, I have to add some FTSE100 Blue chips.

If I want to step up my efforts to build a million pound pension pot, I need to take a few more risks. So now I am scouring the FTSE250 looking for action. This opportunity arose immediately.

I think the defence industry is attractive at the moment as geopolitical uncertainty increases. But the FTSE 100 defence giant BAE Systems looks fully valued to me. I am holding the stock, but will not buy any more today. The FTSE 250-listed aerospace, defence and security specialist Chemring Group (LSE: CGY) excites me more.

FTSE 250 opportunity

Given today’s global uncertainty, I would expect the Chemring share price to soar. And it is: it is up 32.38% in the last year. That is more than double the 15.46% return of the FTSE 250 as a whole. Over five years, it is up 96.35%.

On 4 June, Chemring reported a 39% increase in its order book to a record £1.04 billion, the highest in its history due to what it described as “Basic rearmament cycle”However, underlying operating profit fell 5% to £25 million after manufacturing sites in Tennessee were hit by bad weather.

As a key NATO supplier, the group is well positioned. Unfortunately, peace will not break out suddenly. European nations will have to rearm if Russia threatens again. Pressure will increase if Donald Trump is elected US president and demands that the continent pay more for its security.

Chemring will see a further boost when economic growth picks up again and governments can spend more on defence. In 2023, Chemring reported annual sales of £472.6 million. CEO Michael Ord is aiming for £1 billion by the end of the decade.

Ord believes the Group’s long-term growth prospects are good as its leading technology offerings have created high barriers to entry.

While net debt increased from £25m to £75.3m in the first half, this was due to the board’s decision to invest more in the business. The ratio of net debt to underlying EBITDA is well below the board’s internal target.

Dividend income

The stock doesn’t look too expensive today, trading at 18.4 times training earnings, and dividends are also expected. The forecast yield of 2.1% doesn’t sound particularly impressive, but a closer look reveals a different story.

Over the last three years, the board has increased dividends per share by 23.08%, 18.75% and 21.05%. Let’s see what the chart says.

Chart by TradingView

My biggest concern is that I don’t like buying a company after it’s had a good run. It would have been much better to buy Chemring before Russia invaded Ukraine. The return on equity was pretty solid, reaching 12.86% a few years ago. However, it has since dropped to 8.31%. Let’s look at the chart again.

The story continues

Chart by TradingView

Still, I think there is an exciting opportunity here and given the state of the world, I’m not sure it’s worth waiting for a lower entry point. I’ll buy Chemring as soon as I have cash to spare.

The post I’m aiming for a million by adding this world-class growth stock to my portfolio appeared first on The Motley Fool UK.

Further reading

Harvey Jones holds positions in BAE Systems. The Motley Fool UK has recommended BAE Systems. The views expressed on companies mentioned in this article are those of the author and may therefore differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2024