Saab's Q3 clearly beat our expectations. Revenue, EBIT and EPS were all well above our estimates and in line with or slightly above consensus. Organic growth accelerated to 31% in the seasonally weakest quarter, driven by Surveillance and Naval, and order intake and cash flow were also very strong. Following the report, we raise our 2026-28 revenue and EBIT estimates by about 2-4%, with Surveillance as the main source of the upgrade. However, the share price has risen ~14% since our last update, outpacing our estimate revisions. We therefore lower our recommendation to Reduce (prev. Accumulate) with a target price of SEK 670 (prev. SEK 635). This is a valuation call rather than a change of view on the company. The multiples only reach our acceptable ranges at the end of our forecast period, which in our view leaves insufficient risk-adjusted upside.

Surveillance and Naval carried the summer quarter

Revenue came in clearly ahead of our estimate and slightly above consensus, and the margin also exceeded our expectations. Surveillance drove the beat with high radar volumes and strong operating leverage, while Naval grew rapidly as the Polish submarine program got under way. Aeronautics improved its margin but still carries T-7A costs, and both Aeronautics and Dynamics grew more slowly than we expected. Dynamics was the weak spot, as higher R&D and delivery mix pushed its margin down from an exceptionally strong comparison period. Order intake beat our already high expectations on a stronger flow of smaller orders, and customer advances drove a strong cash flow.

Estimates up, with the mix shifting toward Surveillance

We raise our 2026-28 revenue and EBIT estimates by about 2-3%. EPS rises less, as the tax rate and minority interests have been higher than we assumed. For 2026, much of the Q3 beat had already been penciled in for Q4, and we have also lowered our Q4 margin assumption due to lower profitability expectations in Dynamics and Naval, where rising R&D and capacity ramp-up costs weigh on margins, so the full-year change is modest. For 2027-28, Surveillance is the main source of the upgrade, while Naval rises on the ramp-up of the A26 program. Aeronautics and Dynamics are largely unchanged, and our group margin path is broadly the same. We have also raised our cash flow estimates on lower working capital, partly offset by higher investments in line with management's comments on the capacity build-out.

Strong execution, but the share price already reflects it

At the current share price, Saab trades at 35x and 29x P/E and 27x and 23x EV/EBIT for 2027–28. Our acceptable long-term ranges of ~22–25x P/E and ~17–20x EV/EBIT are reached only in 2029, meaning the share already prices in several more years of strong earnings growth and continued execution. We still think the premium over peers is deserved, given the scarcity of comparable European defense assets, the delivery track record, and an ownership structure that supports long-term decision-making. However, at current levels the valuation leaves little room for setbacks. In our framework, strong earnings growth drives the expected return, but the multiple contraction needed to reach our acceptable ranges offsets much of it, and the dividend yield is below 1%. Our target price of SEK 670 implies only ~4% upside, and the expected return falls short of our cost of equity. To be clear, this is a valuation call rather than a change of view on the company. We regard the Q3 performance as positive and continue to like the direction of the business, but we see a more attractive entry point at a lower share price.