J.P. Morgan downgrades Hensoldt to “neutral” on delayed growth, higher costs

Investing.com -- J.P. Morgan downgraded Hensoldt AG (ETR:HAGG) to “neutral” from “overweight,” saying that while the German defence electronics group remains well positioned for long-term growth, its near-term progress will be slower than expected and weighed down by continued high investment spending.

The brokerage had upgraded Hensoldt in June, anticipating that the company was emerging from a heavy investment phase and ready to capitalize on surging German defence budgets. 

However, following Hensoldt’s Capital Markets Day (CMD) on Tuesday, J.P. Morgan said the company’s updated guidance showed sales and EBITDA margin improvements would be “more back-end loaded” than previously forecast.

Reflecting the slower earnings trajectory, J.P. Morgan cut its Hensoldt-defined EPS estimates for 2025-2029 by 2% to 10%, with reductions of 2% for 2025, 8% for 2026, 9% for 2027, 10% for 2028, and 6% for 2029. 

The brokerage had already lowered its 2027-2030 EPS forecasts by 6-8% last week in anticipation of weaker guidance. 

Free cash flow forecasts were also revised down due to lower earnings, higher capital expenditure, increased capitalised R&D, and higher-than-expected exceptional costs tied to the completion of its SAP rollout.

J.P. Morgan reduced its December 2026 price target by 9% to €100 from €110, citing the revised earnings outlook. 

The firm maintained its “overweight” ratings on Rheinmetall and Renk, noting that Hensoldt’s slower 2026 growth outlook stands in contrast to its peers. Hensoldt guided to sales growth of 10% in 2026, which J.P. Morgan said would mark the fourth consecutive year it lags Rheinmetall and Renk.

“HAG was very clear that it is poised for a period of very strong growth, not just to 2030 but in the years following this,” the brokerage said, but added that “sales growth of only 10% in 2026, which means that it is likely to lag that of RHM and RENK in 2026, for the 4th consecutive year.”

The slower trajectory, according to J.P. Morgan, reflects both product mix and internal factors. Hensoldt produces more “later-cycle” products, and it still faces capacity constraints. 

The company has been investing heavily in expanding facilities, including a new Optronics site set to become fully operational next year, a major logistics centre, and a new SAP system. 

The brokerage said Hensoldt now needs to complete its SAP investment, which will carry exceptional costs through 2029, longer than the brokerage’s prior expectation of 2026, and fund a larger radar production site.

“To be clear, we think these investments are the right thing to do;, we are just surprised at the cost and time taken,” the brokerage said.

J.P. Morgan described Hensoldt as Germany’s “national champion” in defence electronics and a strategically valuable asset, with strong organic sales growth expected through 2030 and potential for EBITA margin expansion. 

However, it noted near-term concerns including the company’s lagging growth relative to peers, high levels of capitalised R&D, ongoing exceptional charges that reduce earnings quality, and a “full” valuation.

J.P. Morgan identified key risks to its rating and price target, including deviations in European and German defence spending, execution risks in Hensoldt’s production ramp-up, and uncertainty around the company’s plan to add about €500 million to 2030 sales through mergers and acquisitions.