Saab’s 385% Rally Looks Like It’s Running on Fumes, Analysts Say

(Bloomberg) -- Saab AB’s two-year stock rally may be fizzling out amid concerns over the Swedish defense company’s lofty valuation and a recent reminder that some anticipated orders will fall through.

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Last week, Sweden paused plans to send the firm’s flagship Gripen fighter jets to Ukraine, shelving a deal that would have stoked replacement orders. On Monday, UBS Group AG analysts wrote that Saab’s “bullish outlook is already priced in.” The developments come as the company’s shares trade at a premium compared to the average price target of stock analysts, data compiled by Bloomberg show.

With its automotive unit long gone, Saab has hugely benefited from a surge in European military spending since Russia invaded Ukraine, with its order backlog surging 50% from the end of 2021, according to the latest company data. While the rally has put the stock back on the map for many investors, some are questioning if the company will deliver.

“I don’t doubt that orders and revenue will develop very nicely, but Saab has a really bad track record of managing to extract a healthy profitability from its operations,” said Henric Hintze, an analyst at ABG Sundal Collier AB in Stockholm, who has a sell recommendation on the stock.

Saab shares gained 70% this year and 385% since the start of the Ukraine war in early 2022. They are currently trading above the average analyst target price tracked by Bloomberg.

NATO ‘Access’

UBS analysts Kseniia Maslova and Ian Douglas-Pennant, who initiated Saab with a neutral rating, said the stock trades at about a 40% premium to peers. They said Sweden’s membership to the US-led NATO military alliance is “helpful,” but that associated orders will mainly come later this decade.

“Shares could come under pressure if demand growth or pace of execution progress were to surprise negatively,” UBS wrote. Nevertheless, Saab enjoys “strong product reputation, reinforced by continued R&D efforts, and with Sweden’s accession to NATO, it should benefit from improved ‘access’ to joint capabilities initiatives,” the analysts said.

The Swedish government’s decision to halt plans to donate Gripen jets — which would send some of its existing fighters to Ukraine and likely lead to new orders as the Nordic nation rebuilds its fleet — shows the country’s still limited clout within NATO. The plan fell through as Stockholm’s allies wanted to first introduce US-built F-16s to the war-torn nation.

Saab’s Chief Executive Officer Micael Johansson played down the impact of the Gripen incident, which local media in Sweden decried as a major setback. Its stock declined 4.8% the day this news broke.

The Swedish jets may still be sent to Ukraine sometime down the line, and “there is respect for the fact that it’s very complicated to implement two systems at the same time,” he told Bloomberg by phone.

Looking wider at Europe’s defense industry, Johansson said that forecasts for spending over the next decade has increased by $500 billion from last year’s estimates. He noted that investor interest in his company is “very, very high” as Saab tries to both “take market share here and now” and ramp up its product line for the future.

“I haven’t noticed any slowdown, if anything it’s the opposite,” the CEO said in the interview. “It’s definitely full steam ahead, and that’s what we’re talking about with investors.”

Many remain positive on the stock, even if there are warning signs. Forsta AP-fonden, a Swedish pension fund which owns Saab shares, said current geopolitical instability will help the company increase its order intake.

“The company is well positioned to take advantage of the growth opportunities that emerge in today’s surrounding world, even if there are also challenges to deal with, among them the expansion of production capacity,” Mats Larsson, head of equities at the fund, told Bloomberg.

Saab’s stock currently has four buys, five holds and one sell rating on the Bloomberg system, with ABG Sundal Collier’s Hintze noting that there’s been a very strong optimistic trend in outlooks as the share price soared.

“But considering Saab’s track record, the valuation that the share is trading at is simply too high,” he said. “That’s the basis of my case.”

--With assistance from Christian Wienberg and James Cone.

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