By Investing.com — Shares of Saab AB (ST:SAABb) fell on Tuesday after BofA Securities downgraded the stock to “neutral” from “buy.”
At 4:17 am (0817 GMT), Saab AB was trading 5.4% lower at SEK 219.5.
The brokerage’s revised outlook pointed to concerns about the sustainability of Saab’s stellar performance over the past two years.
While Saab has been a standout in the sector, driven by strong order intake and significant topline growth, analysts at BofA cautioned that the company’s momentum may 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.
“Yet, we believe 2024 will set a high bar difficult to match in 2025,” the analysts said.
The analysts said that 2024 might represent a peak year for order intake, particularly after the substantial SEK 13 billion Carl-Gustaf order from Poland.
For Saab to match or exceed such orders in 2025 seems uncertain, with the company’s top line growth expected to decelerate through 2027.
BofA also noted that Saab’s rapid expansion in headcount, while necessary to meet surging demand, could exert pressure on its margins.
Saab added roughly 1,500 employees in the first half of 2024, following a 2,500-employee increase in 2023. This increase in personnel is crucial to support the company’s operations, particularly in its Dynamics and Surveillance divisions, but it has come at a cost.
The Surveillance division has already seen its margins shrink, with EBIT margins falling from 9.5% in the second quarter of 2023 to 7.7% in the second quarter of 2024.
BofA analysts raised concerns that this trend could continue, potentially weighing on the stock over the next four to six months as the company adjusts to its higher workforce.
In addition to margin pressure, Saab’s valuation has surged significantly since the invasion of Ukraine, making it one of the best-performing stocks in the European defense sector.
Its 12-month forward P/E multiple has re-rated by approximately 91% relative to the sector’s 42% re-rating during the same period.
While Saab’s growth justifies a premium valuation, BofA analysts see limited room for further upside. The company currently trades at a 45% premium to the sector on 2025 estimates, which, coupled with the expected slowdown in order growth, suggests the possibility of a multiple de-rating in the near term.
The analysts argue that without further upward revisions to mid-term guidance, Saab’s shares could come under pressure as early as 2025.
In response to these challenges, BofA lowered its price target for Saab from SEK 265 to SEK 240 and revised its earnings estimates for 2024-2026 downward.
For 2024, the EPS forecast was cut by 4.4% to SEK 7.58, while the 2025 estimate was reduced by 7.4% to SEK 9.77.
The revenue estimates for 2024-2026 were also trimmed by 1.9% to 3.8%, reflecting the anticipated deceleration in order intake and top line growth.
Despite the downgrade, the analysts noted that Saab could still deliver solid earnings growth through 2027, albeit at a slower pace than previously anticipated.
While Saab remains a strong player in the defense sector, bolstered by Sweden’s accession to NATO and increasing defense spending, BofA’s downgrade reflects a more tempered view of the company’s near-term prospects.
The analysts acknowledged that Saab could still benefit from new opportunities, especially in its Surveillance division, as defense budgets across Europe expand.
However, the note suggests that much of this upside is already priced into the stock, limiting the potential for further re-rating unless Saab significantly upgrades its mid-term guidance.
Going forward, investors are now focused on Saab’s upcoming fourth-quarter results and any potential adjustments to its mid-term growth targets.
