Deutsche Bank downgraded BAE Systems, Leonardo and Thales on Tuesday, citing weak Maritime margins, French budget uncertainty and limited near-term upside in Europe’s aerospace and defense sector.

Shares of BAE Systems, Leonardo and Thales were down between 0.5% to 1.9% at 03:48 ET (08:48 GMT).

BAE Systems Plc was lowered to “hold” from “buy” rating, with its target price adjusted to 2140p from 2220p. 

The stock last closed at 2093p. Analyst Christophe Menard said BAE is “unlikely to beat FY25 results expectations due to disappointing Maritime margins (6.5% vs. 8% guided), despite better performance in Air and Cyber & Intelligence.” 

Free cash flow is expected to reach £1.5 billion but remains below consensus. FY26 guidance anticipates 7-8% organic growth with only modest EBIT margin improvement as Maritime continues to underperform. 

Menard noted “growing affordability concerns in both the UK and US markets, alongside a blurred US environment,” prompting the limited upside and the rating change.

Leonardo was downgraded to “hold” from “buy” rating with a target price of €57, unchanged from previous guidance. 

The stock last traded at €58.68. Menard said the company presents opportunities, but “within the current scope, we don’t see much more valuation upside.” 

Strategic initiatives have been referenced but not formalized, and execution will be measured through free cash flow generation.

Thales was downgraded to “hold” from “buy” rating, with the target price reduced to €280 from €285. 

The stock last closed at €270.20. Menard highlighted uncertainties surrounding the French defense budget and Cyber sales. About 20% of Thales’ sales depend on French defense spending. 

He cited that France’s Parliament did not pass a budget in December 2025, leaving FY26 defense spending potentially capped at 2025 levels. The French Defence Minister described the scenario as “catastrophic” given urgent military needs to meet NATO obligations by 2035.

Deutsche Bank also updated ratings and targets for other European aerospace and defense names, raising Airbus to “buy” with a target of €250 from €222, keeping Exosens at “hold” with a target of €52 from €49, lowering Fincantieri to “buy” at €23 from €26, moving MTU Aero Engines to “buy” at €449 from €443, raising Rolls-Royce to “buy” at 1325p from 1220p, increasing Safran to “buy” at €348 from €325, and lifting TKMS to “buy” at €99 from €82.

Deutsche Bank expects European defense valuations to remain elevated at 16x-20x EV/EBIT Y+1, but further re-rating is unlikely due to conflicting geopolitical drivers and persistent regional spending disparities. 

The aerospace sector is expected to remain in its 12.5x-17.5x range as no surprise step-up in original equipment deliveries is anticipated.