Written by Sam Bogda
On Wednesday, analysts at Morgan Stanley told investors that the current valuation of the defense sector is attractive at current levels, and that the company is tilting to the upside as “global threats show little sign of abating.”
In a note, they explain that Morgan Stanley has touched base with a broad cross-section of investors over the past month at the MS Laguna conference and other investor days and industry conferences.
“What surprised us in our conversations was that despite heightened geopolitical tensions, investor interest in defense was lukewarm,” they wrote.
They said there appears to be a positive bias about the prospect of a peace deal in Ukraine. However, Morgan Stanley is bullish on defensive stocks and sees a 3-to-1 risk/reward skew.
“In our opinion, this optimism is not reflected in the current dynamics. We do not see an outcome in Ukraine as a major determinant of the sector’s outlook. Moreover, after a long period of relative global stability, there is no recent context for what the ‘things could go wrong’ scenario may appear,” the analysts added. in Europe and the Asia-Pacific region. “We view defensive trading at a premium of around 5% on NTM P/E basis as evidence of relative complacency in the market regarding geopolitical stability and see attractive value today for a sector that presents a healthy growth outlook, earnings view, and bullish earnings opportunity in an uncertain economic environment.” We see a positive risk/reward skew of ~3 to 1 for the defense.”