Investing.com -- Morgan Stanley (NYSE:MS) has upgraded Leonardo S.p.A. (BIT:LDOF), the Italian aerospace and defense company, to "overweight" rating from an "equal-weight," raising its price target for the company's shares to €35 from €25.
Shares of the Italian multinational company rose 1.8% at 08:16 ET (13:16 GMT).
This shift reflects the analysts’ growing optimism about the company’s transformation strategy and potential for financial and operational improvements.
The upgrade is primarily attributed to Leonardo’s focus on addressing long standing challenges in its Aerostructures business, which has been a consistent drag on margins and cash flow.
The division, affected by reduced demand from Boeing (NYSE:BA)'s 787 program, has reportedly consumed over €1 billion in cash over the past five years.
However, Morgan Stanley noted management's plans to restructure this segment, including potential carve-outs or partnerships, as a key step towards achieving breakeven by 2028–2029. If successful, this could add an estimated €200 million to EBITA over the next three years.
Beyond Aerostructures, Morgan Stanley analysts highlighted Leonardo's broader transformation plan, which includes ambitious goals for revenue growth, margin expansion, and improved cash conversion.
The company projects a 7% compound annual growth rate in revenues between 2024 and 2028, supported by its record-high backlog of about €44 billion, which provides approximately 2.5 years of revenue coverage.
This growth is expected to be accompanied by a 210-basis-point improvement in EBITA margins, reaching 10.3% by 2028.
The analysts also underscored Leonardo’s potential to benefit from increasing defense budgets in Europe, particularly in Italy, where defense spending remains below NATO’s target of 2% of GDP.
As a national defense champion, Leonardo is well-positioned to capture opportunities from increased domestic and international spending.
Furthermore, new joint ventures, such as the recently signed land vehicles partnership with Rheinmetall (ETR:RHMG), and potential contracts in secure communications, including collaborations with SpaceX's Starlink, add additional upside to the company’s forecast.
Despite a 64% rise in Leonardo’s share price over the past year, Morgan Stanley considers the stock attractively valued, trading at a discount to its peers.
The analysts believe the company’s continued execution of its transformation strategy, alongside improving sentiment towards its Aerostructures business, could lead to a further re-rating of the stock.
The new price target of €35 reflects a valuation of 14 times the expected 2027 earnings, which aligns with industry peers.
However, risks remain, including potential delays in restructuring Aerostructures, challenges in the broader transformation plan, and possible leadership risks.