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BAE Systems PLC takes off as Berenberg upgrades its rating to ‘buy’ from 'hold'

In a note to clients, analysts at Berenberg said BAE’s fundamentals are improving after many years of lacklustre earnings development
BAE systems building
They also expect BAE's US business will be a key growth driver over the coming years

BAE Systems PLC (LON:BA) shares rose on Tuesday as Berenberg upgraded its rating for the FTSE 100-listed firm to ‘buy’ from ‘hold’ and increased its price target to 700p from 605p, with the company ‘set to enter a phase of consistent growth.’

In a note to clients, analysts at Berenberg said the blue-chip defence contractor's fundamentals are improving after many years of lacklustre earnings development.

READ: BAE Systems sees 2017 sales and underlying earnings rise, but guides for flat earnings in 2018

They said: “BAE’s growth outlook is now much improved, and the defence market remains supportive, factors that are not reflected in the current valuation, in our view.”

The analysts added: “We expect the shares to outperform over the next year driven by a higher rating on this stronger growth profile.”

They said they estimate that 75% of BAE's group revenues will be in growth mode from 2019, underpinned by key programmes and margin expansion of 70 basis points over the next five years due to the mix of strong growth in Electronic Systems and improvement in other segments.

They also expect BAE's US business will be a key growth driver over the coming years, supported by rising US defence spending and strong programme positioning.

In late morning trading, BAE’s shares were up 1.9% to 617.0p.

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