A "new era" of share buybacks is potentially in store for Rolls-Royce Holdings PLC (LSE:RR.) and other members of the European aerospace and defence sector, JPMorgan suggested.
Many sector companies are generating record free cash flows, which is allowing them to step up returns to investors, including active share buybacks from BAE Systems, Melrose Industries, Qinetiq and Safran.
Given their strong expected free cash flows, JPMorgan thinks Rolls, Airbus, Thales and Leonard may look to launch buybacks in the next 12 months.
This is one of the reasons that the European A&D sector "has never been this attractive", the investment bank said, citing long-term growth drivers across civil aerospace and defence markets.
The brokerage highlighted that civil aerospace, Rolls' key market, is benefitting from aircraft delivery growth, strong aftermarket sales, and a favourable US dollar.
Defence spending is expected to continue rising amid shifting geopolitical dynamics, with heightened focus in Europe, Asia, and the Middle East.
"Both sub-sectors are in multi-year sweet spots that we expect to continue through to the end of this decade," the bank said in a note to clients.
Several European defence stocks have seen pullbacks tied to concerns that Donald Trump wants to negotiate a Russia-Ukraine ceasefire and that Elon Musk's planned DOGE (Department of Government Efficiency) will seek to reduce US defence spending.
But the analysts view this as an entry opportunity for investors, with positive recommendations for stocks including Melrose Industries PLC (LSE:MRO, OTC:MLSPF), Leonardo and BAE Systems PLC (LSE:BA.)were identified as particularly well-positioned with near-term catalysts.
Analysts noted that Melrose is “significantly undervalued” and expects its FY24 results to include new medium-term free cash flow guidance.
Leonardo could gain from large new defence contracts and operational improvements in its Aerostructures division.
For BAE Systems, potential Eurofighter export deals and major program authorizations were flagged as likely drivers of value in 2025 and "the upward pressure from geopolitical issues will offset any downward pressure from a desire to cut government spending".