BAE Systems best-placed to benefit from increased spending in UK and US

Company-specific drivers were the reason for the European Aerospace and Defence sector´s outperformance year-to-date, but in the remainder of 2016 and in 2017 companies´ ability to 'execute' would be the deciding factor, analysts at Goldman Sachs said.

In civilian aerospace, several large programmes were ramping-up production, including LEAP, GTF, A320neo, A350 and Trent XWB.

On the defence side of the quation, meanwhile, Goldman Sachs expected US military spending to improve and in the UK there was greater visibility on large programmes, such as for submarines.

BAE Systems was best-positioned to benefit from those tailwinds, Goldman said.

"The stock trades at a deep discount to US peers and our European coverage despite improving profit growth and free-cash-flow conversion," the broker said in a research note published on 2 September.

Goldman also had some good words for French engine-maker Safran, pointing out how it was trading at a 13% discount to its coverage in terms of its 2018 EV/EBIT multiple yet offered a superior earnings outlook.

Airbus also offered meaningful value, but concerns about cycle-phasing kept the broker from ascribing a higher multiple to its future earnings. The pan-European aerospace giant was trading at a 2018 price-to-earnings multiple of nine versus Boeing at 16.

Quinetiq on the other hand was entering a period of lower margins and cash flows due to price pressures from the Ministry of Defence and working capital headwinds.

Thus far in 2016, the sector had fallen by 1.54% versus the 7.1% drop in the Stoxx 600 despite analysts having cut their earnings forecasts for the firms in the space by almost twice as much as the broader benchmark (by -11.5% compared to -5.9%).

In the case of the London-listed companies within the sector, the main drivers of their better relative performance had been M&A speculation at Meggitt, stabilisation at Rolls Royce and end-improvement at BAE Systems.