Morgan Stanley has identified BAE Systems (LSE:BA.) as its preferred investment in the European defence sector, arguing that the recent pullback in the company’s share price presents an attractive buying opportunity as rising defence spending across key global markets is expected to support future earnings growth.
Broker sees attractive valuation after share price weakness
The investment bank reduced its price target on BAE Systems to 2,420 pence from 2,662 pence, reflecting lower sector valuation multiples and a higher discount rate. Despite the target revision, Morgan Stanley reiterated its “overweight” rating on the stock.
The broker highlighted BAE Systems’ extensive exposure to increasing defence expenditure in both the United States and the Middle East, alongside its record £84 billion order backlog and diversified revenue streams, as key strengths supporting its long-term investment case.
UK policy developments expected to provide support
Morgan Stanley also said upcoming UK defence policy announcements should help reduce political uncertainty that has weighed on investor sentiment. The broker believes BAE Systems’ global operations and involvement in both conventional defence platforms and next-generation military technologies leave it well positioned to outperform many of its European peers.
It also argued that the shares warrant trading at a premium to major US defence contractors, citing the company’s stronger expected growth profile, diversified business model and shareholder returns.
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