Oct 27 (Reuters) - Morgan Stanley downgraded the U.S. aerospace and defense industry to "in-line" from "attractive" and said it prefers to be on the sidelines in defense ahead of the presidential elections.
"Aerospace seems highly oversold, yet we don't see the market recognizing this until sometime next year," analyst Heidi Wood said, adding defense stocks could be flat to down in the fourth quarter.
Aerospace and defense sector has outperformed the Standard & Poor's for eight of the last nine years, and a recovery rally for defense stocks looks less assured in the first quarter this time, Wood wrote in a note to clients.
Wood also downgraded Rockwell Collins Inc (COL.N), aerospace electronics company and Raytheon (RTN.N), the U.S. No. 5 defense contractor that makes Patriot and Tomahawk missiles, to "equal-weight" from "overweight."
Rockwell's "equal-weight" rating is consistent with the ratings of other aero aftermarket players such as Goodrich Corp GR.N and United Technologies Corp (UTX.N), the analyst said.
Wood also cut her price target on Rockwell Collins to $39 from $73.
Wood said this year's presidential election could spark a negative buzz for defense.
"With either new president, we anticipate fewer new program starts and new initiatives for greater cost controls on defense programs," the analyst said.
According to Wood, the year-end calm may spark bargain shopping before Christmas for stocks and defense is a potential source of funds should this occur.
"Given defense revenues stem from sources outside of the economy, we expected to find the defense stocks fairly recession resistant," the analyst said.
Shares of Rockwell Collins were down nearly 3 percent at $32.40, while Raytheon shares were up 90 cents at $44.30 in late morning trade on the New York Stock Exchange. (Reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by Gopakumar Warrier, Anil D'Silva)