BAE Systems Shares Cut to Sell: Here’s Why

Kepler Cheuvreux downgraded BAE Systems (LON: BA.) to Reduce from Hold in a note Monday, citing an overly optimistic market re-rating that it believes is not supported by fundamentals. 

The firm set a new price target of 1,510p on the stock, up from 1,350p, but warned investors that recent share price gains may be misleading.

The firm noted that BAE Systems is the bellwether in European defence and a de facto US prime in its own right. 

They added that while the company offers “one of the most dependable sources of income growth,” expectations have outpaced reality.

According to the broker, BAE’s upcoming half-year results, due 31 July, are likely to be “soft,” and while management is expected to reaffirm full-year guidance, there is “limited room for upside versus consensus estimates.”

The downgrade is said to reflect concerns that the stock’s strong performance has been driven more by technical factors than by underlying earnings growth. 

“The market may be excused for falsely believing that the share price move is driven by significant pending upgrades to growth estimates, when for now the main reason for the inflated P/E is forced buying by macro, ESG, and ETF funds,” the analysts warned.

Kepler also trimmed adjusted earnings per share forecasts to account for a weaker U.S. dollar and a larger share count, as BAE’s buyback programme becomes less effective at higher share prices.