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Defence companies downgraded on eurozone and US spending concerns

Concern over possible further cuts in US defence spending allied to eurozone instability has prompted downgrades to a raft of defence companies from broker Investec.

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Concern over possible further cuts in US defence spending allied to eurozone instability has prompted downgrades to a raft of defence companies from broker Investec.

Political indecision in the US could impact trading near-term while potential for further US defence budget cuts from ‘sequestration’ threatens the longer-term, Investec said. 

A decade of annual increases in the US defence budget has come to an end as austerity, budget reform and the wind-down of two major conflicts impacts total spending, it added. 

US spending is scheduled to fall by US$487 bln over the next ten years, but investor sentiment will be further affected by the threat of an automatic ‘sequestration’ of a further US$500 bln from next January if there is no agreement on a federal deficit reduction plan. 

Slow US orders are likely to persist up to and through the US presidential election, while UK and European budgets are likely to remain challenged, the broker said. 

Until visibility improves, defence ratings will remain depressed it believes and so lowered its rating across the sector.

Cobham (LON:COB) and QinetiQ (LON:QQ.) are downgraded from ‘hold’ to ‘sell’ with reductions in their target prices to 200p from 235p and QinetiQ to 130p from 150p.

BAE Systems (LON:BA.) gets its target price reduced to 295p from 360p and is now a ‘hold’ from a ‘buy’.

Ultra Electronics (LON:ULE) (PT 1560p from 1850p) and Avon Rubber (LON:AVON) (PT 315p unch) are also now ‘holds’ from ‘buys’ previously. 

Rolls-Royce (LON:RR) is Investec’s key pick and remains a ‘buy’ with an increased target price of 920p up from 850p.

GKN (LON:GKN) is also a ‘buy’, though the target price for the auto parts group is lowered to 225p (240p). 

Investec favours civil aerospace over defence stocks and believes civil-facing stocks will continue to deliver good growth as the ramp-up at Boeing and Airbus is well underway and high rates of production will be sustained until the end of the decade. 

 

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