BAE Systems slips on Credit Suisse downgrade

BAE Systems was under pressure on Tuesday after Credit Suisse downgraded the stock to ’underperform’ from ‘neutral’, saying it was not the bank’s preferred defence name, particularly after its recent strong run.

CS said given the current backdrop of heightened security threats and questions on economic growth, defence stocks appear attractive in principle, which is a positive for BAE.

However, it prefers outperform-rated Thales, which it said offers more attractive prospects than BAE Systems if the latter cannot leverage its historical position in Saudi Arabia for more orders.

The bank said exposure to the US and a weakening pound are supportive to the stock, adding that the weakening sterling is also boosting its US sales and profits translated back into sterling.

However, it highlighted the stock’s recent outperformance as a reason for the downgrade.

BAE Systems has been outperforming its US peers by 15% since the budget deal announcement in late October, despite benefitting less than them.

In addition, CS reckons the UK-Saudi relationship and the Saudi financial tensions are not supportive of any large order in the near future.

Credit Suisse cut BAE to ‘neutral’ back in October due to the deterioration of the relationship between the UK and Saudi Arabia, which accounts for about 20% of group revenues.

It said the market had been counting on the potential sale of another tranche of 48 Typhoon to lift BAE’s mid-term prospects quite significantly, but this has proven slow to come.

At 0916 GMT, BAE shares were down 1.9% to 502p.