General Dynamics raised, L3Harris cut at Morgan Stanley in defense ratings switch

General Dynamics (NYSE:GD) +0.7% and L3Harris Technologies (NYSE:LHX) -1% on Friday as Morgan Stanley shuffles ratings for the two defense names, upgrading GD to Overweight from Equal Weight with a $345 price target, raised from $293, and downgrading LHX to Equal Weight from Overweight with a $257 PT, trimmed from $275.

Morgan Stanley’s “Defense Primes” had materially underperformed the S&P 500 heading into the Q2 earnings season, but General Dynamics (GD), L3Harris (LHX), Northrop Grumman (NOC) and Lockheed Martin (LMT) all posted beat-and-raise quarters, buoyed by supply chain improvement and healthy defense outlays rates, the bank says.

As a result, Morgan Stanley’s Kristine Liwag now sees General Dynamics (GD) with a “premier balance sheet and strong prospects for capital return upside,” as a refreshed lineup of new Gulfstream aircraft coupled with strong demand for the company’s defense products present strong earnings growth potential.

In her downgrade of L3Harris (LHX), Liwag says she prefers peers with more inherent upside potential from supply chain improvement, while elevated leverage following the Aerojet deal limits near-term capital return upside vs. peers.

The bank also reiterated Northrop (NOC) at Overweight with key overhangs lifted, such as questions around B-21 bomber profitability, and Lockheed (LMT) at Equal Weight while encouraged by topline acceleration as the supply chain improves.