Defense stocks are falling. Why investment banks do not write them off their accounts

On December 16, shares of defense companies in Europe slightly recovered the morning decline. At the opening, the securities were getting cheaper on US President Donald Trump's statement that the truce between Russia and Ukraine is "closer" than ever. Over the past week, the STOXX Europe Aerospace & Defense index fell by 2.8%. However, several investment banks wrote that European defense companies are at the beginning of a long growth cycle that will last at least until 2030.

On Tuesday, the first-ever summit of the NATO Eastern bloc, which includes countries that have sea or land borders with Russia and Belarus, was held in Helsinki. The leaders of Sweden, Estonia, Latvia, Poland, Bulgaria, Romania and Lithuania said that even in the event of a ceasefire, Russia remains a threat to the EU.

The outcome was a declaration in which the parties agreed to develop a joint flagship defense project in the eastern part of the EU. The EU was called upon to allocate funds to strengthen ground forces, air and missile defense, border and critical infrastructure protection, and to improve military logistics.

EU and NATO countries have already increased defense spending, and this is a structural transition, not an ad hoc decision, Bank of America analysts said. In a note dated Dec. 5, they said European defense companies are at the very beginning of a long growth cycle that will last until at least 2030. In addition, in defense spending, laid out in the budgets of countries, the share that goes exactly to the purchase of weapons and equipment, and not on salaries and maintenance of personnel is growing: now it is about a third, and by 2030, analysts of the bank expect an increase to 40%. This means a large and long flow of orders for weapons, ammunition, armored vehicles, aircraft and electronics. BofA estimates that the defense sector on average trades at about 11.7 on an EV/EBIT multiple for 2028, with a fair range of 12-14. That is, at fairly conservative multiples, they see about 20-25% upside potential across the sector.

- Rheinmetall is named by two banks at once in the list of the main beneficiaries of the new EU defense concept. The company's shares were falling by almost 5% at the opening on December 16. Morgan Stanley writes in its December 12 report that Rheinmetall is one of the best ideas in the sector and a key stock in 2026. The bank maintains an "above market" rating and a target price of €2,500 per share - that's 66.4% above the closing price on Dec. 16. Analysts expect an average annual growth rate of 40% through 2030, after the company at Capital Markets Day raised its revenue target to €50 billion for 2030, while the previous forecast was in the €40-€50 billion range. The bank notes that Rheinmetall is no longer limited to ground systems, but is actively expanding into air defense, digital solutions, drones, space and naval platforms. The company stresses, however, that 2030 is not a "ceiling" for growth, as NATO and German rearmament programs already extend to 2040, and Rheinmetall is present in virtually all key segments of defense spending.

BofA also puts Rheinmetall at the top of the sector, although it cut its target price from €2540 to €2215, 47.5% above the closing price on Dec. 16. The German company's order book is already strong, with major ground systems and munitions programs ahead. Analysts expect the company's earnings per share to grow by about 35% per year through 2030, while the sector will grow by an average of 20%. The bank maintained its "buy" recommendation.

- On the list of recommendations from BofA, shares of Italian company Leonardo, the bank expects the stock to rise to €63, up 40.4% from the closing price on December 16. The key message is that Italy is accelerating the growth of its defense budget and will approach around 3% of GDP by 2030. This means strong order growth for the company, especially in aviation, helicopters and electronics. In addition, Leonardo is actively working to spin off its loss-making aircraft components business into partnerships with other companies, which should reduce the burden on profits and make the group's structure more transparent. Analysts expect free cash flow to improve markedly in 2025-2030, creating room for both investment and shareholder distributions.

- Indra Sistemas: BofA notes the Spanish software developer, maintaining a "buy" recommendation and a target price of €59.5, up 28.2% from the closing price on Dec. 16. Indra is gradually moving away from its IT outsourcing business to become a defense company. The company is reallocating resources to the aerospace and defense sector: control systems, radars, command and control solutions, simulators and anti-drone systems. This should improve profitability and the quality of the company's cash flow, the bank said. Today, BofA estimates that Indra is trading at about 35% discount to the sector's average valuation on multiples for 2028, and they anticipate that this gap will narrow as the company completes its transformation into a defense company.

- SAAB: Analysts at BofA raise their recommendation on SAAB from "sell" to "buy" and their target price from SEK 471 to SEK 565, up 16.7% from the closing price on December 16. The company's main growth driver is the GlobalEye radar aircraft program and the Gripen fighter jet. The company is already showing a strong order flow and has an option: Ukraine has signed a letter of intent for the purchase of 100-150 units of Gripen fighters, which, if realized, will give a strong impetus to the portfolio. The authors of the report expect SAAB to have double-digit revenue growth rates of about 20% per year until 2030 and further profitability growth, because an increasing share of sales is accounted for by complex and high-margin platforms.

- Hensoldt - Citi analysts are betting on this company, calling it one of the most interesting ideas in the European defense industry and giving it a "buy" rating with a €101 target price, up 45.3% from the closing price on Dec. 16. The company makes the "eyes and ears" of the modern military. The company designs and manufactures air defense and aviation radars, surveillance and reconnaissance systems, optoelectronic sensors, and electronic warfare solutions. According to the bank, the sell-off in the sector is excessive, while Hensoldt's growth prospects look better due to the fact that about 60% of its revenue is tied to Germany and its defense spending, i.e. one of the clearest and largest sources of demand in Europe. Citi also likes the German budget mechanism: Germany, they say, can increase defense spending through debt rather than through politically unpopular measures like raising taxes or cutting other items. But they immediately stipulate that after reaching 3.5% of GDP by 2029, the growth rate of the German defense budget may slow down.

This article was AI-translated and verified by a human editor