FTSE 250 stocks rarely offer a blend of structural growth and rising earnings visibility, yet with a deeply discounted valuation. One company that fits that bill, however, is defence specialist Chemring (LSE: CHG).
It continues to benefit from multi‑year demand and rising margins, built on a structural long-term strengthening of the West’s defences.
Yet despite the stronger backdrop, the shares remain priced as if little has changed. So, where should the shares be trading now?
Where is the price momentum coming from?
A higher share price ultimately needs a stronger profits engine behind it, which is why the momentum building inside the business matters so much.
One risk is that any delays in major programme awards could push revenue realisation further out than analysts currently expect. Another is any production capacity constraints that could limit how quickly new orders translate into delivered revenue.
Nevertheless, Chemring sits at the centre of key required defence capabilities. These include mission-critical energetic materials, electronic warfare, and active cyber defence solutions.
And NATO member states have pledged to increase their annual defence spending to 5% of gross domestic product by 2035. This equates to an estimated $2.7trn (£2trn) in extra annual funding across all NATO member states by that time.
Given this, analysts forecast that Chemring’s earnings will rise an average of 13.5% a year to end-2028 at minimum.
Where should the shares be priced?
Price and value are two very different things in the stock market. A share’s price simply reflects what buyers and sellers agree on at a particular moment, whereas its value is rooted in the strength and prospects of the underlying business.
For long‑term investors, that gap matters hugely. Over time, market prices have a habit of drifting back toward a company’s true worth — its fair value — which is why understanding the difference can be so powerful for building returns.
To ascertain where a stock ought to trade, many investors rely on discounted cash flow (DCF) analysis. It projects future cash flows and discounts them back to today.
The less uncertain those projections are, the higher the discount applied. Because analysts sometimes choose different assumptions, their DCF models can diverge. But using my own framework — including an 8.5% discount rate — Chemring looks 29% undervalued at its current £5.26 price.
Therefore, its fair value is around £7.41 — comfortably higher than the current level. So, if markets continue to close the gap between price and value over time, this could be a terrific buying opportunity if those DCF assumptions hold.
My investment view
Chemring combines rising earnings, stronger long‑term visibility, and a valuation still looking far too modest for the progress being delivered.
Its position in structurally important defence niches gives it dependable demand and multi‑year growth potential. With margins improving and order books strengthening, the business continues to build real momentum beneath the surface.
For investors seeking a high‑quality FTSE 250 name trading below fair value, Chemring looks a compelling candidate for deeper consideration.
I already own shares in the same sector — BAE Systems, and Rolls-Royce. Owning another would unsettle the risk/reward balance of my portfolio. But, if I were able to, I would buy Chemring stock today.
As it is, several deeply undervalued shares in other sectors have recently caught my eye.
Should you invest £5,000 in Chemring Group Plc right now?
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Simon Watkins owns shares in BAE Systems and Rolls-Royce.
