Image source: Rolls-Royce plc
One of the big investment themes for 2025 has been the increase in defence spending. And beyond the obvious names, there’s a FTSE 250 stock that’s showing positive signs.
Senior (LSE:SNR) designs and manufactures fluid conveyance and thermal management (FCTM) components. And I think its latest results look very encouraging.
A stock in transition
At the moment, Senior is a firm in transition. It’s in the process of selling off its aerostructures unit (which makes structural parts for aircraft) and has agreed a price of up to £200m.
That leaves behind the FCTM business, which makes things like tubes and hoses for liquids to flow through. These are used in aircraft, but also in land vehicles and industrial settings.
It sounds basic, but it really isn’t. Senior’s products are highly technical, bespoke, and often protected by regulation that specifies their use.
Management is targeting 5% organic revenue growth, 10% operating margins, and returns on capital employed of between 15% and 20%. But the latest results are some way short of this.
Early signs
Excluding the divested aerostructures unit, Senior’s revenues grew at 3% during the first half of 2025. Operating margins were 8.4% and returns on capital employed were 11.9%.
All of those are some way short of the firm’s target metrics. But there were some positive signs, most notably as a result of the company’s sales to the defence industry.
Senior’s components are used on a number of US military aircraft. And revenues in the defence part of the business grew 14% during the first half of the year.
With European countries increasing their defence spending, management is anticipating good growth from this part of the business. That could be very positive for the FTSE 250 firm.
Analysis
I think Senior looks like a really interesting stock. Leaving aside any cash coming from the sale of its aerostructures unit, if it can hit its medium-term targets, the shares could be a bargain.
The firm made 5.07p per share during the first half of 2025. But management thinks operating margins could increase 20% from their current levels.
That would take earnings per share to 6.03p. And if it achieves something similar in the second half the year, the current share price implies a P/E ratio of around 15.
For a company planning on growing revenues at 5% a year on average, I think that’s quite attractive. And a boost from increased defence spending is a welcome addition.
A stock to buy?
Of course, there are a lot of ‘ifs’ in there. One of the risks with Senior from an investment perspective is that its customers are relatively limited. This is especially true in its aviation divisions.
Barriers to entry in this industry are high, but there aren’t huge numbers of firms making aircraft engines. And that’s not ideal from the perspective of a company making components for them.
Nonetheless, Senior is at an interesting crossroads. If management can achieve its goals with the restructured business, I think the stock could well be a bargain.
My own view is that the cash from the divestiture and the boost from higher defence spending make it worth the risk at today’s prices. That’s why it’s on my list of shares to consider buying.
