JPMorgan downgrades BAE Systems to 'underweight'

The bank said BAE’s lacklustre guidance for 2018 earnings before interest, tax and amortisation and free cash flow suggests that, for the foreseeable future at least, it will continue to underperform its peers in US defence and in European civil aero.

JPM reckons the US portfolio can grow more than 5% a year for several years. However, UK sales look flat at best and defence export sales are unpredictable by nature. The bank argued that BAE needs a new export Eurofighter order to fill a hole in its delivery schedule from 2019-21.

"Our estimates only include deliveries where a firm order is won so there would be upside to our 2019- 21E earnings per share if a large Eurofighter order was secured. Based on channel checks we worry Saudi Arabia won't order EFs in the coming year, but this is just our opinion."

Shares in BAE fell on Thursday as it posted a jump in 2017 sales and earnings but said earnings for 2018 would be flat on the back of organisational changes and the adoption of a new accounting standard. Analysts had been expecting earnings to rise 2% in 2018.

At 1015 GMT, the shares were down 2.2% to 572p.