Credit Suisse bumps up target price for BAE Systems

Analysts at Credit Suisse bumped up their target price for BAE Systems to incorporate the firm´s recently-released 2016 full-year numbers and its latest financial guidance.

As regards the defence contractors's 2016 financials, earnings per share were 2.0% ahead of analysts' estimates and at 1.54bn pounds net debt was below those same forecasts as the company churned out more cash than anticipated.

The Farnborough-based aerospace and defence group also guided towards a rise in underlying earnings per share in 2017 of between 5.0% and 10.0%, which was roughly in-line with the consensus figure.

Assuming a pound-US dollar exchange rate of 1.25 against 1.30 before and lower financial costs, operating income in 2017 would be largely unchanged from Credit Suisse's prior estimate, but the 2018 figure would be 1.0% higher and 4.0% more in both 2019 and 2020, analyst Oliver Brochet said.

On the basis of the above, and using a sum-of-the-parts methodology, Brochet raised his target price from 520.0p to 610.0p, while keeping his recommendation on the shares at 'Neutral'.

Brochet also factored in a higher enterprise value-to-earnings before interest and tax (EV/EBIT) multiple of 11.8, versus 10.5 before.

That increased multiple was a reflection of the more favourable prospects for the US business and in-line with that of its US peers.

BAE shares were then trading at a 27.0% discount to its US rivals in terms of its 2018 price-to earnings (P/E) multiple, in comparison to an average discount between 2009 and 2016 of 24.0%.

"We believe that this discount results from the less attractive portfolio of BAE vs the main US primes and the large UK pension deficit. A 'blue sky' scenario comes to 720p, including higher US defence spending and a Typhoon order from Saudi Arabia."