The Defense Sector is Attractive at Current Levels – Morgan Stanley

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On Wednesday, analysts at Morgan Stanley, told investors that the defense sector’s current valuation is attractive at current levels, and the firm’s bias is to the upside as “global threats show little sign of abating.”

In a note, they explained Morgan Stanley touched base with a wide swath of investors over the past month at the MS Laguna Conference, investor days, and other industry conferences.

“What struck us in our conversations is that despite rising geopolitical tensions, incremental investor interest in Defense is tepid,” they wrote.

They said there appears to be a positive bias that a peace agreement is potentially forthcoming in Ukraine. Even so, Morgan Stanley is bullish on defense stocks and sees a risk/reward skew of 3-to-1.

“In our view, this optimism is not reflected by current dynamics. Nor do we see an outcome in Ukraine as the primary determinant of the sector’s prospects. Moreover, after a prolonged period of relative global stability, there is no modern context for what a ‘things could get worse’ scenario might look like – both in Europe and the Asia-Pacific,” the analysts added. “We view Defense trading at a ~5% premium to the S&P 500 on a NTM P/E basis as evidence of relative market complacency regarding geopolitical stability and see attractive value today for a sector that offers a healthy growth outlook, earnings visibility, and upside earnings opportunity in an uncertain economic environment. We see a positive risk /reward skew of ~3-to-1 for Defense.”