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On Tuesday, BofA Securities analyst Benjamin Heelan upgraded BAE Systems (LON:BAES) Plc, a major defense contractor, upgrading the stock rating from ’Underperform’ to ’Buy’. Accompanying this upgrade, Heelan also increased the price target from GBP15.15 to GBP22.80, signaling a significantly more optimistic outlook for the company’s shares.
The upgrade by BofA Securities comes amid a reassessment of the European defense landscape, which is expected to experience considerable growth in the coming years as European nations invest more heavily in their defense capabilities. Heelan pointed out that geopolitical tensions worldwide and the technological advancements of Chinese military equipment are driving NATO and global policymakers to focus more on sovereignty and domestic production.
Heelan highlighted the strategic position of BAE Systems in this evolving defense sector. With its extensive intellectual property in areas such as missiles, air systems, and autonomous precision strike capabilities, BAE Systems is well-positioned to benefit from the shift towards hard power over soft power. The analyst believes that this shift will result in a sustained growth trajectory for companies like BAE, potentially supporting premium valuations in the mid-term.
The new price target reflects a 30% premium to the mid-cycle earnings, based on a price-to-earnings (PE) ratio of 22x and an enterprise value to EBIT (EV/EBIT) ratio of 18x, up from the previous 17.6x PE and 14.3x EV/EBIT ratios. This adjustment is made in anticipation of strong growth and is based on 2029 estimated multiples, discounted back to 2025 estimates, marking a forward-looking approach to the company’s valuation.
BAE Systems’ portfolio and geographic exposure are considered key advantages that align with the increasing emphasis on defense sovereignty and production within the European Union, India, Japan, and Saudi Arabia. The analyst’s outlook indicates an expectation that BAE Systems will leverage these themes to its advantage, positioning the company for long-term growth beyond the coming decade.
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