Could this rising FTSE 250 defensive star be a better buy than BAE Systems shares?

FTSE 250– in charge QinetiQ (LSE: QQ.) would be a good choice to give me exposure to the defense sector.

Currently, BAE Systems (LSE: BA.) seems to be the most popular choice, in my opinion.

Let's look at sharing QinetiQ in more detail.

Big business

QinietiQ was founded by the Ministry of Defense (MoD) back in 2001, and focuses on testing applications for military and civilian use.

Defense spending has increased dramatically in recent years. This has been exacerbated by the country's recent tragic conflicts. While I hope for peaceful solutions, there is more to the use of defense than weapons of war.

The stock has had a good 12-month period. They are up 48% from 324p this time last year, to current levels of 481p. BAE Systems is up 40% over the same period.

The investment case

QinetiQ has recorded two positive trading updates. The 2024 report released in early June made for good reading. This includes agreeing to an increase in revenue, order book, profit, and dividends, compared to 2023.

Coming to the latest, the Q1 update released last week confirmed that the order book has grown, compared to the same period last year. The majority, 64%, were long-term contracts. And, it's on track to deliver key targets between now and 2027. An example of one is high single digit organic growth.

According to Statista, defense spending has actually reached record highs, and shows no signs of slowing down. This could spell good news for firms like QinetiQ to continue growing earnings and returns.

I must admit that I am encouraged by QinetiQ's strong relationship with the MoD. This gives direct access to the UK government, and potentially lucrative contracts.

Digging into some fundamentals, QinetiQ shares look cheaper than many of its peers. They currently trade at a price-to-earnings ratio of just over 16, compared to a peer group average of 37. For further comparison, BAE trades at an average price of 23.

This company QinetiQ paid a dividend of 1.8 %. Although the benefits are never guaranteed, I can see this rate of return growing. BAE shares offer a yield of 2.31%.

Risks and final thoughts

From a bearish perspective, the obvious risk is that a conflict resolution could dampen earnings for all defense stocks. However, QinetiQ's business includes more than just military and defense applications, so this is not a major concern of mine. And, with any product-based business, there is always the concern that product failure, inefficiency, or operational problems could have reputational and financial damage to the business, not to mention investors' sentiments.

Overall, I would say that QinetiQ is another good way to gain exposure to the defense sector.

The shares are cheaper than BAE, and may have more growth potential, if you ask me. BAE is already a big beast in itself. I wouldn't say QinetiQ shares are better than BAE shares. However, they can be a cheaper alternative, with continued growth opportunities.

I would be willing to buy QinetiQ shares if I had money to spare.