Deutsche Bank downgraded BAE Systems to 'hold' from 'buy' on Tuesday and cut its price target to 2,140p from 2,220p, pointing to limited upside to current levels, as it took a look at European aerospace and defence stocks.
The bank said BAE is unlikely to beat FY25 results expectations due to disappointing Maritime margins (6.5% versus 8% guided), despite a better performance in Air and Cyber & Intelligence.
"While we expect free cash flow to hit £1.5bn, it remains below consensus," DB said. "FY26 guidance anticipates 7-8% organic growth with only modest EBIT margin improvement, as Maritime continues to underperform."
Deutsche said that growing affordability concerns in both the UK and US markets, alongside a blurred US environment, had led it to revise its price target. "The limited upside drives us to move from a buy to hold rating," it said.
In the same research note, Deutsche lifted its price target on 'buy' rated Rolls-Royce to 1,325p from 1,220p to reflect a sector re-rating.
"Despite persistent supply chain constraints impacting Aerospace, Rolls-Royce should demonstrate solid performance in Aerospace in 2025-2028," it said. "Power Systems is experiencing strong growth driven by data centres and defence contracts, with potential for significant upside as of 2025."
DB said that while Small Modular Reactor (SMR) programmes show promise across multiple regions, their concretisation is still pending.
"The company's confidence in future cash flow is underscored by an ongoing and expanding share buyback programme, with our expectation of seeing it exceed £1bn in 2026."
Deutsche Bank said its preferred stocks in the sector this year are Airbus, Safran, MTU Aero Engines and Rheinmetall.