Barclays has identified two European aerospace companies as its preferred investment opportunities within the aircraft engine sector, pointing to different attractions for investors looking for exposure to the industry.
The bank’s assessment considers a range of factors, including financial strength, growth prospects, competitive positioning, operational delivery and balance sheet quality. Against these criteria, Barclays sees Safran and Melrose as offering particularly compelling, although distinctly different, investment cases.
Safran (EU:SAF)
Safran is Barclays’ preferred name in the European aircraft engine sector, with the bank describing the company as a “quality compounder” capable of delivering attractive returns consistently over the longer term.
According to Barclays, Safran offers a particularly strong combination of growth, earnings visibility and resilience. Its leading position in engines for narrow-body aircraft remains a major competitive advantage, while expansion within its defence activities provides another potential source of growth.
The company’s established record of operational execution also supports the investment case, alongside a positive net cash position that provides additional financial flexibility. Barclays believes these characteristics underpin a high-quality long-term market capitalisation growth story.
Safran currently trades at a premium to many aerospace peers, but Barclays considers that valuation justified by the quality of the business. The bank also views the premium as reasonable when compared with other leading European industrial companies.
Barclays has increased its price target for Safran to €390 from €370 and maintained its Overweight recommendation.
Melrose (LSE:MRO)
Barclays views Melrose as the more growth-oriented opportunity within its European aerospace coverage, highlighting the company as offering the highest free cash flow growth across the stocks it follows.
The business also provides particularly strong exposure to rising original equipment production and the recovery in wide-body aircraft manufacturing, giving investors significant leverage to improving aerospace production volumes.
Barclays acknowledges that uncertainty has increased following the Garden Grove scandal but believes investors have responded too negatively to the situation.
Since the disclosure, Melrose’s relative share price underperformance implies approximately £1.4 billion of lost market value. Barclays considers this substantially greater than both the financial impact currently identified and its own estimate of the liability that the company is ultimately likely to face.
The bank also notes that Melrose is smaller and more complicated to model than many of its larger aerospace peers. As a result, Barclays believes the shares may be less efficiently valued by the market.
Rather than viewing that complexity purely as a disadvantage, Barclays sees it as an investment opportunity. Combined with what it considers the strongest growth profile within its coverage, this supports the bank’s Overweight recommendation and £7.10 price target for Melrose.
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