Morgan Stanley upgrades BAE Systems on improved earnings visibility
The stars are lining up for BAE Systems, according to analysts at Morgan Stanley, who on Monday upgraded their recommendation for the shares from 'equalweight' to 'overweight' on the back of increased visibility on the company's earnings.
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Over the past 12 months, the defence contractor had seen a "dramatic turnaround" in the stability and visibility of the business.
First off, several of the drivers predicted in its 'bull' case had now materialised.
"The Air industrial footprint looks secure, lower pension contributions are locked in,and growth drivers in the U.S. businesses look much more solid. We now factor several elements of our previous bull case into the base case," they said.
As a result, they now estimated that the firm's EPS could grow at a compound annual growth rate of roughly 7%, versus 5% before.
Furthemorre, longer-term wins on Maritime, Air and US Land underpinned "significantly better" visibility, leading the broker to predict that the company would be able to sustain its earnings growth beyond 2020.
The resolution of the various 'non-structural' operational issues afflicting the company - such as in commercial shipbuilding and the UK carriers - might act as a catalyst for the share price over the next 12 months, Morgan Stanley added.
On the back of all of the above, the broker said the shares could trade back at the top-end of their range of the last three to five years, instead of at their average multiple over that time frame.
That would mean changing hands at a 2020 price-to-earnings multiple of 14.4, versus 12.0 at present on the back of their revised forecasts, leading them to lift their target price from 550p to 750p.