Institutional Equity Research

Defense Sector Earnings Upside & Valuation Model

UBS Thesis Analyzer: Unappreciated Backlog Conversion & Margin Operating Leverage

DEF
Market Price: $525.50
UBS Implied Value
$686.40
+$160.90 / share
Valuation Upside
+30.6%
vs. Market Price
Consensus Target
$490.00
Implied PE: 20.0x
Valuation Gap
$196.40
UBS vs. Consensus
Thesis Status
Undervalued by Market
High Margin Expansion
Thesis Presets Select Scenario
Model Drivers
UBS Projected EPS (FY+2) $31.20
Consensus is $24.50. UBS models accelerating defense margins.
Operating Margin Expansion +180 bps
Supply chain normalization & fixed-price contract roll-off.
Order Backlog $142.5 B
Firm defense commitments across missiles & aeronautics.
Discount Rate (WACC) 8.5%
Cost of equity & long-term cost of sovereign debt.
Terminal Growth Rate 2.5%
Aligned with long-term global defense budget expansion.
Exit P/E Multiple 22.0x
Market median for prime defense contractors is ~19.5x - 20.0x.
Valuation Sensitivity Curve Implied Upside (%)

Sensitivity of implied share price upside across varying operating margin expansion levels (0 bps to +300 bps) at the selected 8.5% WACC.

UBS Research Takeaway

The defense giant is trading at an implied discount to intrinsic value. At a $142.5B backlog and +180 bps margin expansion, UBS's projected $31.20 EPS translates to an implied valuation of $686.40 per share (+30.6% upside over current $525.50 market price).

Analyst Handoff & Export

Generate institutional research briefing JSON containing active DCF variables, implied valuation multipliers, and sensitivity distribution.

Artifact exported successfully
Source Grounding & Research Context: Modeling UBS equity research highlighted in CNBC reporting regarding unappreciated earnings upside for major defense contractors. Parameters reflect historical industry multi-year order backlogs (e.g. Lockheed Martin, General Dynamics, Northrop Grumman), defense budget procurement cycles, and operating margin recovery following fixed-price contract overhang. Data snapshot: September 2026.

Saved earnings and discount assumptions

Read the explanation

Saved forward earnings thirty-one point two times hypothetical multiple twenty gives six hundred twenty-four dollars per share. Source default multiple twenty-two gives six hundred eighty-six point four. Bars compare these components at point eight pixels per dollar. Forward earnings and price multiples are assumptions rather than verified forecasts or current quotes. Saved discount eight point five minus terminal growth two point five percent gives point zero six fraction. Hypothetical four minus two point five gives point zero one five, but source floors at point zero three. Bars compare default and floored spreads at eight thousand pixels per fraction. Floor limits sensitivity but does not validate the valuation. Saved backlog one hundred forty-two point five times point zero eight times margin factor one point zero one eight minus point nine five, divided by point zero six times three point eight, gives three point four. Source blending adds thirty percent of that to earnings component six hundred eighty-six point four, yielding six hundred eighty-seven point four two, rounded six hundred eighty-seven point four. Bars compare component and rounded result at point eight pixels per dollar. Complete native valuation JSON/preset restore preserved; investment validity unproved.

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