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BAE upgraded to Equal Weight by Barclays as it backs firm as “defensive income investment”

The bank said a “material” order book growth forecast for 2018, an improving cash profile from “longer-cycle phasing” in 2020, a 5% dividend yield, and an “undemanding value” with a 20% discount to US peers all backed the defence firm as an income stock
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Barclays was more upbeat than UBS which cut its rating to Neutral in December amid concerns Brexit could hurt defence spending

BAE Systems PLC (LON:BA.) has been upgraded to Equal Weight from Underweight by Barclays as analysts said the firm was supported as “a defensive income investment” and increased their earnings per share (EPS) estimates for 2019 and 2020 by 4% and 11% respectively.

In a note, the bank said a “material” order book growth forecast for 2018, an improving cash profile from “longer-cycle phasing” in 2020, a 5% dividend yield, and an “undemanding value” with a 20% discount to US peers all backed the FTSE 100 defence firm as an income stock.

READ: BAE Systems exposed to possible defence spending constraints after Brexit, says UBS

Analysts added that earnings growth and cash generation were “central for price momentum for BAE” and were supported by mid-single-digit year-on-year revenue growth with a 20-year long cycle visibility.

The bank also said execution discipline on the ramp-up of franchise programmes such as combat vehicles, F35 jets, classified projects, and UK Maritime “should drive EPS growth”, modelling a 9% EPS compound annual growth rate (CAGR) for the three years to the end of 2021.

READ: BAE Systems reiterates forecast for flat 2018 earnings in anodyne trading update

Analysts also upped their target price for BAE to 550p from 497p, saying they had “more bullish growth and margin expectations” for the group’s Electronic Systems segment and the Platforms & Services business in the US.

The outlook from Barclays was more upbeat than a previous take from Swiss Bank UBS in December when the stock was cut to Neutral from Buy amid concerns Brexit-related defence spending cuts in the UK could hit its performance.

In lunchtime trading Tuesday, BAE shares were up 1.1% at 502.2p.

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