Saab AB Shares Decline After BofA Downgrade

Shares of Saab AB experienced a decline on Tuesday following a downgrade from BofA Securities, which changed its rating from “buy” to “neutral.”

At 4:17 AM (0817 GMT), Saab AB’s shares were down 5.4%, trading at SEK 219.5. The brokerage’s updated outlook highlighted concerns regarding the sustainability of Saab’s impressive performance over the past two years.

While Saab has distinguished itself in the sector due to strong order intake and significant revenue growth, analysts at BofA warned that the company’s momentum could slow in the near future. The downgrade was influenced by several factors, raising doubts about Saab’s ability to maintain its growth beyond 2024.

The analysts noted that 2024 could be a peak year for order intake, particularly after a substantial SEK 13 billion order from Poland for the Carl-Gustaf system. Matching or exceeding such orders in 2025 appears uncertain, with expectations of a slowdown in top-line growth extending through 2027.

Additionally, BofA pointed out that Saab’s rapid increase in workforce, although necessary to meet rising demand, may put pressure on its profit margins. The company added approximately 1,500 employees in the first half of 2024, building on a previous increase of 2,500 employees in 2023. While this hiring surge supports operations—especially in the Dynamics and Surveillance divisions—it has had financial implications. The Surveillance division has already recorded declining EBIT margins, dropping from 9.5% in the second quarter of 2023 to 7.7% in the same quarter of 2024.

BofA analysts expressed concern that this margin compression could persist, potentially impacting the stock in the next four to six months as the company adapts to the larger workforce. Moreover, Saab’s valuation has significantly increased since the invasion of Ukraine, positioning it as one of the top performers in the European defense sector. Its 12-month forward P/E multiple has surged by about 91%, compared to a 42% rise in the sector during the same timeframe.

While Saab’s growth merits a premium valuation, BofA analysts believe there is limited potential for further increases. The company currently trades at a 45% premium to the sector based on 2025 projections, and paired with the expected slowdown in order growth, there is a risk of a multiple de-rating in the near future. Without substantial upward revisions to mid-term guidance, the analysts suggested that Saab’s shares could face downward pressure by 2025.

In light of these challenges, BofA lowered its price target for Saab from SEK 265 to SEK 240 and adjusted its earnings forecasts for 2024-2026 downwards. The EPS estimate for 2024 was cut by 4.4% to SEK 7.58, while the 2025 estimate was reduced by 7.4% to SEK 9.77. Revenue estimates for 2024-2026 were also decreased by 1.9% to 3.8%, reflecting the anticipated slowdown in order intake and revenue growth.

Despite the downgrade, analysts noted that Saab could still achieve solid earnings growth through 2027, albeit at a slower rate than previously expected. While Saab continues to be a formidable player in the defense sector, supported by Sweden’s NATO membership and rising defense expenditures, BofA’s downgrade indicates a more cautious outlook on the company’s short-term prospects.

The analysts acknowledged that Saab might still find new opportunities, particularly in its Surveillance division, as European defense budgets expand. However, much of this potential upside appears to be already factored into the stock price, limiting opportunities for further valuation increases unless Saab significantly revises its mid-term guidance.

Looking ahead, investors will be attentive to Saab’s forthcoming fourth-quarter results and any modifications to its mid-term growth targets.