Chemring (LON:CHG) is primarily a defence group that currently focuses on countermeasures, counter IED, pyrotechnics and munitions.  These four areas take advantage of the company's three core competencies of energetic material expertise, high product safety and reliability and high volume manufacture of explosive products.

An entertaining review of the company can be seen at http://iball.iii.co.uk/2008/05/06/chemring-plc-chg

They've managed to grow earnings and dividends in 9 out of the last 10 years and just as importantly, that growth has been consistent.  The compound rate of earnings growth in the last decade is around 27% and nearer 40% in the last 5 years.  Return on equity has averaged over 19% and return on capital employed is typically over 30%.  Free cash flow has been generated in all of the last 8 years and capital expenditure has been just over half of total cash flow, leaving plenty of extra cash for dividends and more growth.

In a nutshell the company has been growing like crazy and is expected (by the company and analysts alike) to keep growing at a somewhat lesser pace for at least the next few years.  Of course, we all like a bit of growth, but what about the price?

At 693 pence the price to earnings ratio is around 14 and the current earnings yield is 7%, which is just above the level of a basket of investment grade corporate bonds.  That's not great, but it's not terrible either.  The dividend yield is low at less than 2%, so that's not fantastic, but with a historic growth rate of 27% it starts to look more acceptable.  The PE is well below the price/earnings/growth ratio using historic growth, and it is also well below the level suggested by a proxy of a 15% discounted cash flow calculation (6.5 + ½ of growth).  The current PE sits at its historic average which isn't helpful, although that hasn't stopped past investors earning fantastic returns.

In order for me to expect a decent return, Chemring is more reliant on future growth than any of my other holdings.  If earnings stay close to where they are now for the next few years there seems little reason for the share price to increase and with a 2% dividend, that's not much to look forward to.

On…

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