Morgan Stanley Picks BAE Systems, Cuts Rheinmetall Target
Morgan Stanley announced on Thursday that it has removed Rheinmetall AG from its European defence “Top Pick” list and appointed BAE Systems PLC as the new Top Pick, while maintaining an “overweight” rating on both stocks.
For Rheinmetall, the broker reduced the price target by 30 % to €1,750 from €2,500. The downgrade follows Germany’s decision to cancel the €12.8 billion F126 frigate programme, which was intended to deliver six large multipurpose warships. Morgan Stanley described the cancellation as completely unexpected and driven by major delays, cost overruns and risks associated with changing the main contractor. Switching the contractor to NVL would have raised the cost of the six frigates to more than €18 billion.
The bank estimates that the F126 cancellation will lower Rheinmetall’s 2030 earnings‑per‑share by approximately 2 % and reduce 2030 naval sales by €1.4 billion, representing a roughly 30 % cut for the naval division but only a 3 % impact at the group level. Germany now plans to procure eight MEKO A‑200 DEU frigates, with a contract value of €6.3 billion for the first four ships and an option for four more at €5.3 billion, implying a total value of €11.6 billion subject to Budget Committee approval.
Regarding BAE Systems, Morgan Stanley raised the stock to its new Top Pick in European defence and cut the price target to 2,420 pence from 2,662 pence. The adjustment reflects a mark‑to‑market of the sum‑of‑the‑parts multiples and a modest increase in the weighted average cost of capital by 25 basis points to 7.75 %, accounting for UK political uncertainty. The broker sees more than 30 % upside to its forecasts and believes current overhangs will subside, offering an attractive entry point. BAE shares closed at 1,825 pence on 23 June 2026, after the broker’s revision moved the 2028 price‑to‑earnings multiple from 22‑23 times down to 17 times.
BAE’s fiscal‑year‑2025 revenue was geographically diversified: 43 % from the United States, 27 % from the United Kingdom, 12 % from Europe excluding the UK, 10 % from the Middle East and 4 % from Australia.
The broker also highlighted the Boxer contract as a key catalyst for Rheinmetall, noting a low probability that the contract will not materialise because it is part of a NATO requirement that Germany must fulfil.