Ultra Electronics boosted by JPMorgan upgrade

Ultra Electronics got a boost as JPMorgan Cazenove upgraded the stock to ‘overweight’ from ‘neutral’.

The bank said the upgrade reflects three things. Firstly, it noted the stock has pulled back 12% since 3 June.

Secondly, it pointed to green shoots of recovery in western defence spending alongside sustained strong spending in defence export markets, especially the Middle East.

Finally, JPMorgan said western defence stocks are more attractive on a relative basis in a period of heightened economic uncertainty.

“So far in 2015, four of the five major western European defence spenders (France, Germany, UK and Sweden) have modestly increased their defence budgets. We want to emphasize that the increases are very modest, but this is nonetheless a major inflexion point, in our view, which along with ongoing strength in export markets makes us turn more positive on the defence end market.”

The bank trimmed its price target on Ultra to 1,875p from 1,920p to reflect a higher risk premium for the just-closed Herley acquisition, but said this still offers a potential 13% return.

As far as the stock’s valuation is concerned, it noted that Ultra is trading on a 2016 price-to-earnings ratio of 12.4x versus the European defence average of 13.6x.

At 1228 BST, Ultra shares were up 2.2% at 1,696p.