Citi Names Top Pick with 60% Upside in Bullish European Defense Call

Citi has turned bullish on European defense stocks, arguing that the sector’s recent derating offers significant upside despite concerns over funding, shifting warfare technology, and company-specific setbacks, with its top pick offering as much as 60% upside to target price.

Babcock is Citi’s top pick in the sector, with 60% potential upside to target price. The brokerage acknowledges investor concerns given Babcock’s 65% exposure to UK defense and a recent £140m charge on its Type 31 program. 

However, Citi notes that of that 65% UK exposure, 75% is tied to servicing the UK’s nuclear submarine fleet and maintaining much of the Royal Navy’s surface fleet, both areas Citi views as increasingly critical and therefore more likely to be properly funded going forward. Citi also expects risks around Type 31 to diminish as the first vessel nears completion.