BofA Downgrades Saab AB: Shares Slip 5.4% Amid Concerns Over Growth Sustainability

The recent downgrade from BofA Securities has put a dent in the outlook for Saab AB (OTC: SAABF), with shares declining by 5.4% to SEK 219.5 in early trading. The shift from a "buy" to a "neutral" rating comes in light of growing concerns regarding the sustainability of the company’s remarkable performance over the past couple of years.

While Saab has indeed shone brightly within its sector, primarily fueled by robust order intake and impressive revenue growth, BofA analysts have thrown a cautionary flag. They argue that the company may struggle to maintain its momentum beyond 2024. Their assessment suggests that 2024 might be a peak year for order intake, especially following a substantial SEK 13 billion order from Poland for the Carl-Gustaf weapon system. Looking ahead, matching or surpassing such monumental orders in 2025 seems like a tall order, with growth anticipated to slow down through 2027.

Another layer of complexity is Saab's aggressive hiring spree; the company expanded its workforce by approximately 1,500 employees in the first half of 2024, adding to a staggering 2,500 new hires in 2023. While this growth is essential to meet the demand in both its Dynamics and Surveillance divisions, it inevitably raises concerns about margin pressures. The Surveillance division has already fared unfavorably, witnessing EBIT margins dip from 9.5% in Q2 2023 to 7.7% in the same quarter for 2024. Analysts at BofA noted that this trend might persist, casting a shadow over the stock in the upcoming months as adjustments to the newly expanded workforce take shape.

Moreover, post-Ukraine invasion, Saab’s valuation has surged, positioning it as one of the top performers in the European defense landscape. The company’s 12-month forward P/E multiple represents a staggering 91% increase compared to a 42% rise for the sector, placing Saab at a 45% premium on 2025 estimates. This may signal a potential for de-rating, especially if order growth continues to decelerate.

In response to this slew of challenges, BofA has revised its price target for Saab, downgrading it from SEK 265 to SEK 240. The forecast for earnings per share has also been trimmed; 2024’s EPS was slashed by 4.4% to SEK 7.58, while the estimate for 2025 sees a 7.4% reduction to SEK 9.77. Additionally, revenue projections for 2024 through 2026 have been cut by between 1.9% to 3.8%, aligning with expectations of slowing growth in orders.

Despite these challenges, the analysts believe that Saab still holds the potential for solid earnings growth through 2027, albeit at a more subdued pace than previously predicted. While Saab benefits from external factors such as Sweden’s NATO membership and a general uptick in defense spending, BofA’s downgrade indicates a more restrained view of the company's immediate prospects.

Investors are now eagerly awaiting Saab’s fourth-quarter report, hoping for insights into any modifications to its mid-term growth outlook. With defense budgets across Europe on the rise, investors are keen to see if Saab can seize new opportunities, particularly within its Surveillance division. However, as analysts suggest, much of this upside may already be accounted for in the stock’s current valuation, leaving traders to ponder the potential for any further re-rating without significant upgrades to Saab’s performance forecasts.