Why I think Chemring will be my favourite stock in 2025.

Defence manufacturers' and contractors' success is often a product of geopolitical instability. Looking specifically at the UK, firms like BAE have enjoyed a good couple of years of strong rises in valuations off the back of issues like the war in Ukraine. At the same time, with such strong performance from BAE, I suspect its upward trajectory may continue to slow down and so I have been looking for another European defence company to buy into. My first preference would have been Rheinmetall, however, I am waiting for a better entry point price-wise.

In the interim, what caught my eye was a company called Chemring who produce: explosives, propellants, and, on theme for myself, a cyber security offering, Roke, which saw a 17% increase in revenue in 2024, and is targeting revenues of more than £250 million per annum by 2028. Chemring is also a major supplier to NATO and allied militaries in Europe.

In December, Chemring made a number of headlines for a 13% drop in its share price following full-year numbers publication in mid-December. The strange thing is, the results weren't abysmal, bar the results from one of its factories in Tennessee that was afflicted by a period of extreme cold which hit operating profit. The headwinds may come from a pullback in business from the UK state owing to fiscal tightening, however, the rest of Europe is certainly pumping money in. £90 million has been awarded to maximise capacity at a site in Norway which, according to Investors Chronicle, should deliver an extra £60 million in revenue per year.

The 13% drop was therefore in my view disproportionate, and the stock dropped a further 5% between then and the second week of February 2025. Overall, between the outbreak of the Ukraine war and today, the company's stock price has only gained about 30%. If the company had truly poor fundamentals or irrelevance to the defence landscape in Europe, then perhaps the lack of interest could be justified. Alternatively, it may just be undervalued; a lot of money has since flowed into the company, the market just has not recognised it yet.

This may be about to change. As Europe rearms and concerns about the long-term management of the Ukrainian situation are refreshed, defence companies across the board in Europe should benefit. Chemring is a good company, with rising orders and a strong balance sheet; £57.6 million debt:£329.6 million equity. Its earnings per share growth rate is a cool 16.7%, and its overall earnings growth rate is a less-than-industry but still strong 18.1%. The numbers stack up, and I will be interested and excited to see whether Chemring pulls through this year. If not, I strongly suspect in the years to come the investment will pay off.