Morgan Stanley starts ‘top pick’ BAE Systems at ‘overweight’

The bank said BAE is its ‘top pick’ among the defence names.

"We believe the group is in the early phase of a multi-year upturn, driven by strong and consistent programme execution, rising global defence spending, and diverse positions on key growth programmes," it said. "Our longer-term (2025-30) earnings forecasts are materially above consensus (6% CAGR versus 3% for consensus)."

MS said its conviction is driven by its bottom-up programme forecasts, which it thinks may be too conservative still.

"We do not believe the growth outlook is accurately reflected in the current valuation, with the shares trading in-line with their recent (1year) average and at a 10% discount to US peers.

"We think the shares deserve a higher rating. At our price target, the shares would trade on a P/E of 16x in 2025, in-line with US Defence Prime peers, which we think is justified given the group's diversified portfolio and long-term growth and shareholder returns outlook."

Morgan Stanley said it expects consistent execution and order activity to drive consensus expectations higher.

"The group has an attractive shareholder returns policy, with a dividend yielding 3% and an ongoing share buyback programme, which we think could be extended," it said.

The bank initiated coverage on the broader European aerospace and defence sector with an "attractive" view, as it said that with valuations near historical highs, earnings upgrades are key for further upside to European defence shares.

"We're defensive, preferring stocks with diversified exposures and where current expectations are not elevated," it said.

In the same note, it initiated coverage on Dassault Aviation and Leonardo at ‘equalweight’, Thales at ‘overweight’ and Hensoldt at ‘underweight’.