Shares of Saab AB fell after Investing.com downgraded BofA

Investing.com — Shares of Saab AB (ST:) were lower on Tuesday after BofA Securities downgraded the stock to a “neutral” rating from a “buy” rating.

At 4:17 am (0817 GMT), Saab AB was trading 5.4 percent lower at SEK 219.5.

The brokerage’s revised outlook showed concerns about the sustainability of Saab’s stellar performance over the past two years.

While Saab has been a sector standout thanks to strong order intake and significant top-line growth, analysts at BofA warned that the company’s momentum could slow in the near future.

The downgrade was fueled by several factors that cast doubt on Saab’s ability to maintain its growth trajectory beyond 2024.

“However, we believe 2024 will set a high that will be difficult to match in 2025,” the analysts said.

Analysts said 2024 could represent a peak year for order intake, particularly after the substantial SEK 13 billion Carl-Gustaf order from Poland.

That Saab will match or exceed such orders in 2025 seems uncertain, with the company’s top-line growth expected to decline through 2027.

BofA also noted that Saab’s rapid staff expansion, while necessary to meet growing demand, could put pressure on its margins.

Saab added approximately 1,500 employees in the first half of 2024, following an increase of 2,500 employees in 2023. This increase in personnel is crucial to support the company’s operations, especially in the Dynamics and Surveillance divisions, but had a cost.

The Surveillance division has already seen its margins squeezed, with EBIT margins falling from 9.5% in the second quarter of 2023 to 7.7% in the second quarter of 2024.

BofA analysts expressed concern that this trend could continue, potentially weighing on the stock over the next four to six months as the company adjusts to the larger workforce.

In addition to margin pressure, Saab’s valuation has risen significantly since the Ukraine invasion, making it one of the best-performing stocks in the European defense sector.

The forward 12-month P/E multiple has been revalued by about 91% versus the sector’s 42% revalue over the same period.

While Saab’s growth warrants a premium valuation, BofA analysts see limited room for further growth. The company currently trades at a 45% premium to the sector to 2025 estimates, which, along with expected slowdown in order growth, suggests the possibility of a near-term downside multiple.

Analysts say that without further upward revisions to medium-term guidance, Saab shares could come under pressure as early as 2025.

In response to these challenges, BofA lowered its target price for Saab from SEK 265 to SEK 240 and revised down its earnings estimates for 2024-2026.

For 2024, the EPS forecast was cut by 4.4% to SEK 7.58, while the estimate for 2025 was cut by 7.4% to SEK 9.77.

Revenue estimates for 2024-2026 were also cut by 1.9% to 3.8%, reflecting the anticipated slowdown in order intake and top line growth.

Despite the downgrade, analysts noted that Saab could still produce solid earnings growth through 2027, albeit at a slower pace than previously anticipated.

While Saab remains a strong player in the defense sector, buoyed by Sweden’s NATO membership and increased defense spending, BofA’s downgrade reflects a more tempered view of the company’s near-term prospects.

Analysts acknowledged that Saab could still benefit from new opportunities, particularly in the Surveillance division, as defense budgets in Europe expand.

However, the note suggests that much of this upside is already baked into the share price, limiting the potential for further revaluation unless Saab significantly updates its mid-term guidance.

Looking ahead, investors are now focusing on Saab’s upcoming fourth-quarter results and possible adjustments to its medium-term growth targets.