Introduction
Amid global geopolitical tensions and soaring rearmament budgets, Europe’s defense sector has surged to the forefront of investor attention. Even as the recent U.S.-EU trade agreement raised eyebrows, the momentum behind European defense companies remains intact—and possibly underestimated. With key tailwinds and long-term catalysts, savvy investors are now positioning themselves for multi-year gains.
One of the Best Brokers in Europe
To ride this trend with confidence and efficiency, choosing the right broker is essential. Leading platforms like DEGIRO and Interactive Brokers Europe offer seamless access to defense and aerospace equities across European markets, with low transaction costs and robust data tools for informed decision-making.
Financial Performance
Despite short-term volatility following the U.S.-EU agreement, major European defense firms such as Rheinmetall, Leonardo, and Saab have delivered exceptional earnings growth in 2024 and are expected to continue this trajectory through 2026. Q2 results showed revenue increases between 15% and 28% YoY, driven by rising defense contracts and backlog acceleration.
Key Highlights
- Rheinmetall: Record order backlog of €38B as of Q2 2025
- Saab: 19% increase in operating income, with key demand from Nordic countries
- Leonardo: Significant ramp-up in drone and AI-enabled defense tech
Profitability and Valuation
Despite a strong rally, many defense stocks in Europe are still undervalued compared to U.S. peers. The average P/E ratio stands around 14.6x, while U.S. defense stocks hover above 20x. Forward P/E ratios suggest continued upside, especially with earnings revisions trending upward across the sector.
Debt and Leverage
Most top defense firms in Europe maintain moderate leverage, supported by strong government contracts. With stable free cash flow and improved credit ratings, their balance sheets are in a healthy position to scale operations and invest in R&D.
Growth Prospects
The rearmament wave in Europe—prompted by Russia’s invasion of Ukraine and heightened NATO commitments—is not a one-year phenomenon. Multi-decade investment plans from countries like Germany, France, and Poland point to a defense budget expansion of over €200B by 2030. This unlocks significant long-term growth potential for domestic defense champions.
Technical Analysis
Technical patterns on stocks like Rheinmetall (RHM.DE) show bullish formations, with the current breakout above €510 signaling momentum toward higher highs. Short-term support at €490 appears strong, while volume confirms institutional interest. Fibonacci extensions suggest targets at:
- 3 months: €545
- 6 months: €590
- 12 months: €650
Potential Catalysts
- Further NATO budget commitments
- Export deals with Asian and MENA countries
- AI-integrated combat and surveillance tech contracts
- Geopolitical events accelerating procurement cycles
Leadership and Strategic Direction
Companies like Rheinmetall and Leonardo are doubling down on R&D and joint ventures to expand their technological edge. Strategic acquisitions and partnerships in unmanned systems, AI, and cybersecurity further enhance their competitive moat.
Impact of Macroeconomic Factors
While inflation and interest rate hikes affect broader markets, defense remains relatively insulated due to state funding. The EU’s strategic autonomy push also favors domestic procurement, shielding key players from trade agreement volatility.
Total Addressable Market (TAM)
Europe’s defense TAM is projected to exceed €500B by 2030, with potential upside if geopolitical tensions persist. This expansion includes conventional weapons, AI-guided systems, drones, naval upgrades, and cybersecurity infrastructure.
Market Sentiment and Engagement
Investor interest remains robust, as evidenced by strong ETF inflows into defense-focused funds like iShares Aerospace & Defense ETF and increased analyst coverage. Retail investor sentiment is also rising, driven by social media momentum and rising share prices.
Conclusions, Target Price Objectives, and Stop Losses
Our current investment thesis identifies Rheinmetall as a core play:
- Entry: €505
- Short-term target (3M): €545
- Medium-term target (6M): €590
- Long-term target (12M): €650
- Stop-loss: €480
Other notable stocks: Saab (SAAB-B.ST), Leonardo (LDO.MI), and Thales (HO.PA).
Discover More
For more insights into analyzing value and growth stocks poised for sustainable growth, consider this expert guide. It provides valuable strategies for identifying high-potential value and growth stocks.
We also have other highly attractive stocks in our portfolios. To explore these opportunities, visit our investment portfolios.
This analysis serves as information only and should not be interpreted as investment advice. Conduct your own research or consult with a financial advisor before making investment decisions.
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