2021: July (SOLD +38%)

Ultra Electronics Holdings PLC (ticker: ULE) engineers bespoke solutions in the defence, security, critical detection, and control markets. It operates through three segments: Maritime, Intelligence & Communications, and Critical Detection & Control. 

The company offers sensor, sonar and anti-submarine warfare systems.

The company operates mainly in North America, the United Kingdom and Mainland Europe, was incorporated in 1993 and is headquartered in London.

 RATIONALE

The top 10 stocks on our screen this month comprised either of companies already added to the CC portfolio, companies with limited financial information, companies with red flags (such as increasing debt) or companies with questionable ethics. So we have searched a little further afield on our list this month and have come across what appears to be a classic 'heads I win, tails I don't lose too much' pick. It is not a traditional value stock pick, as you will be able to see from the RADAR plot and it's financials. Though not currently undervalued, this pick is based on the stability of the company's current outlook, with a possibility of a large amount of growth if certain factors are in their favour.  

ULE had a robust performance in 2020, despite headwinds caused by COVID. Single digit growth was seen in their order book, revenue, operating profit, profit before tax and earnings per share. They have also managed to pay down a significant portion of debt (£228.1m to £158.8m ) and increase their free cash flow (£99.4m to £64.7m). 

Some financial highlights are below, for more detail you can view their annual report here: 

Images courtesy of Ultra Electronics Holdings PLC.

How do Ultra Electronics Holdings PLC make their money?

  • ULE provides electronic and software technologies for the defence, aerospace, security, transport, and energy markets. 
  • The company develops relationships with customers to identify needs and customise solutions. It has a wide product portfolio to sell differentiated technologies and systems for improving communication platforms. 
  • Thousands of contracts are created with a multitude of customers each year. 
  • It reports in three segments: 
    • Maritime 
    • Intelligence and Communications 
    • Critical Detection and Control
  • Approximately half of the revenue is derived from North America and around one-third comes from the United Kingdom.
  • If you are still thinking, 'yeah but what do they actually make?!' - here are a few examples of the recent contracts that they have been awarded:

So why do we like Ultra Electronics Holdings PLC?

As ever, when we are looking at companies, the first and most important box to tick is whether or not they are making money. This is especially important during the current Brexit/COVID environment - because who knows how long these business killers will be around for? As far as we're concerned, if you're not able to make money now, there is no guarantee you will be any better off in 2-3 years' time. 

As demonstrated above, ULE have done very well throughout 2020 and have the largest order book in the company's history for 2021 already in place. The potential upside comes from the US - by far ULE's biggest client. It isn't clear yet what the new presidential administration's focus is going to be with regards to defence, but from the 2021 defence budget early signs are that there will be an increase in spending on defence overall, and in particular moving funds away from counter terrorism and into 'near peer threat management'. This is an area of ULE specialisation and could represent an area of significant growth for the company. 

Conversely, the headwinds created by COVID in terms of global debt management may mean that defence spending could be curtailed in the future. Overall, ULE are confident of mid-single digit growth every year for the next 5 years. To hear more about this from the CEO, Simon Pryce, you can watch an interview with him here - https://www.ultra.group/gb/investors/results-centre/

Conclusion

We believe Ultra Electronics Holdings PLC are well placed for stable growth over the next 2-3 years, with the possibility for significant growth if market conditions are in their favour. We like the company's attitude and strategy, as well as their healthy and sustainable dividend yield of 2.5%.  

We will be adding it to the CC portfolio on Monday.