Cohort plc (LON:CHRT): A High-Flying Stock Flying Too Close to the Sun?

Cohort plc (LON:CHRT), a UK-based defense and technology firm, has soared on investor optimism, fueled by robust earnings growth and a 17% return on equity (ROE)—a figure matching its industry average. Yet its stock trades at a price-to-earnings (P/E) ratio of 33.9x, nearly tripling the broader market multiple. While the company's recent financials are undeniably strong, this premium valuation hinges on an increasingly shaky premise: the belief that 1.9% annual earnings growth over the next decade—far below the market's 15% average—can justify such a lofty multiple.

A Snapshot of Cohort's Recent Triumphs

Cohort's fiscal 2025 results were a masterclass in execution. Revenue surged 33% to £270 million, while profit jumped 25.5% to £19.2 million, driven by demand for its advanced defense systems, including sonar and satellite communications. Its ROE of 17% reflects disciplined capital allocation, bolstered by strategic moves like the 2025 acquisition of EM Solutions, which expanded its intelligence capabilities. The company also maintains a stable dividend policy, with a total payout of 16.30 pence per share in 2025—up 10% from the prior year—and a dividend sustainability score of 83%, suggesting payouts are secure.

The Cloud on the Horizon: Growth Slows, Valuation Stays Steep

The problem lies in the disconnect between Cohort's valuation and its future growth trajectory. Analysts project that earnings growth will plummet to just 1.9% annually over the next five years—a stark contrast to the 11.4% five-year historical CAGR and the market's average growth rate. This slowdown stems from two factors:

1. Market Saturation Risks: Cohort operates in a niche defense sector, where competition for contracts is intensifying. While its order book of £616.4 million (as of April 2025) offers short-term stability, long-term demand hinges on geopolitical tensions and government spending trends that are far from guaranteed.
2. Valuation Overreach: A 33.9x P/E requires decades of sustained growth to justify. For context, the broader industrials sector trades at a 6.92% dividend yield, while Cohort's trailing yield is a paltry 0.88%. Investors are paying a premium for growth that may not materialize.

Dividends: A Safety Net with Limits

Cohort's dividend policy is a double-edged sword. The payout ratio of 0%—likely an error or misclassification, given the 10% dividend increase—suggests earnings comfortably cover dividends. However, its Dividend Growth Potential Score of 38% highlights limited room for future hikes. With earnings growth projections muted, shareholders may see dividends stagnate, undermining the stock's appeal to income-focused investors.

The Bottom Line: A Buy, Hold, or Sell?

Cohort's recent performance deserves admiration, but its valuation is a minefield. Here's the calculus:
- Bull Case: If geopolitical tensions or defense spending booms reignite growth above 10%, the stock could justify its premium.
- Bear Case: A 1.9% growth rate would require the P/E to collapse to 15x within five years to avoid a valuation-induced crash—a likely outcome if expectations reset.

Recommendation: Avoid. Cohort's stock trades on hope, not fundamentals. With growth forecasts lagging and valuation stretched, the risk-reward is skewed toward disappointment. Investors seeking exposure to defense tech would be better served by companies with clearer growth catalysts—or by waiting for a correction in Cohort's shares.

In markets, overvaluation is often a silent killer. Cohort's story is no exception: a 33.9x P/E demands perfection. In a world of slowing growth, perfection is a tall order.