Two 59%+ winners, four above 25% in Aug – How this AI model keeps picking winners
Investing.com -- Citi lowered its rating on Leonardo SpA (BIT:LDOF) stock to Neutral from Buy, flagging limited upside potential following a strong rally this year.
The bank raised its target price to €48.4 from €28.4, but with shares surging 70% year-to-date, it sees “insufficient upside” to retain its Buy rating.
Citi said the two main drivers behind the price target increase are elevated expectations for European defense spending, and a jump in medium-term profit forecasts.
The Wall Street firm highlighted a “step change in European defense budget expectations” from 2.5% to 3% of GDP, driven by geopolitical developments and a more assertive U.S. posture on NATO commitments.
While this change extends the period of supranormal growth for the sector, Citi sees the new defense spending level as “broadly priced in.”
“Following the Zelensky/Trump meeting in the White House and subsequent emergency meetings in Europe, we believe 3% of GDP is now a realistic expectation,” analyst Charles J. Armitage said in a note.
He believes this will extend the duration of supranormal growth from roughly 5 years to around 10 years, boosting Leonardo’s fair value by about €8 per share.
Moreover, a 17% increase in medium-term earnings forecasts, largely from internal growth initiatives, adds another €6. Additional upside came from better cash conversion expectations and the time value of money.
Despite the fundamental improvements, Citi believes the market is already assigning an ambitious growth profile to Leonardo.
“We estimate that market is pricing in about €3.6bn of EBIT in 2034, requiring a growth rate of ~10% per annum from 2028 to 2034,” Armitage wrote, adding that this rate appears achievable but leaves little room for upside surprise.
Leonardo’s long-term prospects remain tied to defense budget dynamics, and further increases to 3.5-4% of GDP could re-rate the stock. However, fiscal and political constraints across Europe may limit the extent of such increases.
“If 3.5% of GDP looks credible, our fair value would increase by ~€8-9 per share,” Armitage noted, but a return to 2.5% expectations would imply an equivalent downside.
Leonardo’s shares are now trading on similar forward multiples as peers BAE Systems (LON:BAES) and Thales (EPA:TCFP), but Citi points out that lower expected cash conversion could make Leonardo appear relatively more expensive over time.