BAE Systems upgraded on big year ahead for defence stocks

JP Morgan Cazenove believes 2016 will be a big year for defence stocks and has upgraded BAE Systems from ‘neutral’ to ‘overweight’.

The investment bank on Monday cited a major escalation in geo-political tensions as a reason why it will be a good year for the sector, as well as it being a “safe haven” as concerns grow about the global economy.

It said there were four key positives for the sector, including the rise in US and European defence spending due to the Middle East, the related refugee crisis and Russia’s foreign policy when it comes to Ukraine and Syria.

JP Morgan Cazenove also said the stronger US dollar is a positive to UK defence companies, while US defence stocks perform better in an election year.

However it wasn’t as upbeat in the civil aerospace sector, with structural headwinds and a weak high-end jet market.

That’s compounded by the fact that a number of companies in the sector are exposed to oil and gas prices.

With that in mind, JP Morgan Cazenove upgraded BAE Systems and also increased its target price from 465p to 605p.

“In recent periods (eg. 2002 and 2006), when the US defence spending was set to increase and/or there was extreme tension in the M.East, BAE traded at a 12-month forward P/E of 16-17x.

“We believe the conditions are in place for such multiple expansion to happen again.”

BAE was also added to JP Morgan Cazenove’s European Analyst Focus List.

Cobham, which is rated at 'overweight', also had its price target rasied from 300p to 335p, as well as Ultra Electronics, also rated at 'overweight', saw its price target rise from 2,000p to 2,210p.