Ahead of BAE Systems PLC's (LSE:BA.) final results next Wednesday, 19 February, Morgan Stanley highlighted the shares as one of its top picks in the defence sector as demand for military equipment continues to grow.
The American bank, which maintained an 'overweight' rating, sees European defence stocks as key beneficiaries of rising global security tensions and increasing military budgets.
It expects European defence budgets to climb significantly over the next decade, with spending on military equipment potentially increasing by over 200% by 2030 in an optimistic scenario.
NATO is considering raising its spending target beyond 2% of GDP, a move that would directly benefit BAE, along with other major contractors Leonardo and Rheinmetall.
While European defence stocks have already rallied 46% since early 2024, Morgan Stanley believes there is still room for growth.
The firm points out that shifting attitudes toward defence spending, alongside increasing retail investor interest - particularly in Germany - are driving sustained demand for defence shares.
The report highlights that BAE has strong long-term potential, thanks to its deep order book, strategic government contracts, and expertise in advanced military technologies.
The company’s broad exposure to defence programmes, including next-generation fighter jets and naval systems, positions it well to capture future spending increases.
Morgan Stanley has set a price target of 1,369p to 1,853p for BAE Systems, using a combination of valuation models. The lower end is based on a multiples-based sum-of-the-parts analysis, while the higher end reflects a discounted cash flow model, capturing the company’s long-term earnings potential.
In afternoon trading on Wednesday, the stock was changing hands for 1,201.5p.