BAE Systems takes off as RBC upgrades to top pick

BAE Systems has started the day up after RBC Capital Markets upgraded it from ‘outperform’ to ‘top pick’, and raising the target price from 570p to 630p.

The investment bank said in a note on Wednesday that it thinks the tide has turned for US defence spending.

“We think investors continue to underestimate the fact that this is BAE's largest end market (~40% of sales), and that its portfolio is well placed to benefit in both shorter cycle (eg USN maintenance) and later cycle (eg F-35, AMPV, ACV) areas of US DoD spending.”

It also believed that investors were overly concerned about the defence spending outlook for Saudi Arabia.

“The recently issued KoSA 2016 budget details a number of spending cuts in other areas, but not in defence, which saw actual spending in 2015 come in ahead of forecast.

“Indications from across the defense industry are that Saudi is continuing to procure defense equipment, shorter cycle areas such as munitions.”

RBC Capital Markets said with Eurofighter production cut from this year, there is now no risk of a production gap and investors can focus on growth prospects in other areas including cyber security.

Shares in BAE Systems were up 10p (2.02%) to 504p at 0932 GMT.