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Investing.com -- BofA Securities analysts have upgraded BAE Systems (LON:BAES)’ stock rating to “buy” from “underperform,” citing the company’s strong position amidst a global focus on national sovereignty and increased defense spending, in a note dated Tuesday.
The price objective for BAE Systems has also been raised to 2,280 GBp, or $123.41 for its American Depositary Receipts, up from the previous 1,515 GBp ($76.95 ADR).
The European defense landscape has undergone a significant transformation, with material growth anticipated as the continent continues to reinvest in its defense industrial base.
While Europe’s immediate defense needs have driven recent sector performance, BofA Securities notes an evolving focus toward global geopolitical tensions and advancements in Chinese military technology.
This shift has placed a growing emphasis on sovereignty and domestic production in countries such as India, Japan, and Saudi Arabia.
Analysts at BofA Securities indicate that the world is entering a period where "hard power" is gaining precedence over "soft power."
Companies with extensive intellectual property in areas like missiles, air capabilities, autonomy, and precision strike are seen as having longer-term growth trajectories, potentially extending well beyond the current decade.
BAE Systems’ diverse portfolio and geographic exposure are believed to strongly align with these emerging trends.
In the United States, budget risks related to the Department of Government are seen as easing. Despite a "skinny budget" suggesting a broadly stable underlying defense budget, recent announcements regarding the F-47 and the Golden Dome system underscore the U.S. administration’s prioritization of long-term technological leadership.
BofA Securities’ Senior U.S. Defense analyst, Ron Epstein, anticipates high single-digit growth in investment accounts through the end of the decade, which supports BAE Systems’ portfolio for strong mid-term growth.
MBDA, Europe’s prominent missile manufacturer, in which BAE Systems holds a 37.5% stake, is flagged as a key asset that analysts believe is not fully valued. Missiles are expected to become a foundational element of European and global sovereignty in the mid-term.
MBDA has initiated a €2.5 billion investment program to expand its capacity and is projected to achieve low-teens growth with gradual margin expansion through 2030.
The growth outlook for MBDA is expected to remain strong beyond 2030 due to its intellectual property-rich portfolio.
BofA Securities analysts apply a 30x EV/EBIT target multiple for MBDA, yielding a valuation of approximately €30 billion for the entity.
For BAE Systems, this stake is estimated to be worth about £9.5 billion, compared to the group’s current £57 billion market capitalization.