Morgan Stanley upgrades Meggitt in positive aerospace note
By Sean Farrell
Date: Tuesday 31 Mar 2020
(Sharecast News) - Morgan Stanley upgraded Meggitt to 'overweight' as the investment bank recommended buying shares in the aerospace sector.
Andrew Humphrey and his team at Morgan Stanley reduced short-term earnings forecasts for the sector but predicted a recovery in demand for flights once the Covid-19 crisis passes.
Humphrey cut earnings per share estimates on average by 40% in 2020 and 28% in 2021 for companies with mainly civil aerospace exposure. He cut his price target for Meggitt, the maker of brakes and other aerospace parts, to 382p from 570p but increased the company's rating to 'overweight' from 'equal weight'.
Morgan Stanley cut its price target for Rolls-Royce to 460p from 770p and also reduced its price target for Airbus to €86 from £150. The analysts cut Safran's price target to €79 from €145 and MTU Aero Engines' to €255 from €122.
Recent share-price falls incorrectly suggest permanently lower airline capital spending, smaller fleets, lower growth and more cyclical profits, he said. Instead there will be severe disruption in the second quarter followed by a gradual recovery into 2021, Humphrey said.
"We do not think consumers' long-term propensity to travel will change materially as a result of Covid-19," Humphrey wrote in a note to clients. "Our base case is that many will still be flying home for Thanksgiving or Christmas this year."
Air traffic, fleet sizes and profitability will return to pre-crisis levels in the long term and "the sector looks cheap on all but the most conservative multiples", he said.
Meggitt's share price has more than halved in 2020, reflecting concerns about its debt and that its aftermarket may be more vulnerable than rivals.
"We believe Meggitt's high and defensive military exposure may be underappreciated, and that exposure to business and regional jet aftermarket provides gearing into a faster recovery in domestic travel," Humphrey wrote. "Recent underperformance creates a tactical opportunity."
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