In this article, we discuss the 10 European defense stocks to buy now. If you want to read about some more European defense stocks, go directly to 5 European Defense Stocks to Buy Now.
In late February, German Chancellor Olaf Scholz said that the country would increase defense spending to nearly 2% of the gross domestic product (GDP), up from around 1.5% in 2021. The increase was in line with targets set by the North Atlantic Treaty Organization (NATO) in 2006 and came after multiple attempts to resist an increase in defense spending owing to a dark 20th century history. In the wake of the Russian invasion of Ukraine, however, Berlin further pledged to create a further $110 billion fund to ramp up military spending.
Analysts view the announcements as a growth catalyst for defense stocks. Seth Seifman, an analyst at JPMorgan, predicted in a note to investors in February that more allocations towards defense by US allies in Europe due to the Russian threat could lead to the emergence of a “more capable European defense industrial base that could become more competitive with that of the US”. In March, Christophe Menard, an analyst at Deutsche Bank, forecast that Europe would increase defense spending by €75 billion in the wake of the Ukraine war.
Ross Law, an analyst at Berenberg, has affirmed that there was greater upside potential in the European defense sector as compared to the US since Europeans were more likely to ramp up military spending due to the proximity of the Russian threat and the “underspending” witnessed in the sector over the past few years. In the near-term, though, the US defense sector and firms like Honeywell International Inc. (NASDAQ:HON), Raytheon Technologies Corporation (NYSE:RTX), and Lockheed Martin Corporation (NYSE:LMT) are also likely to benefit.
EU Nations Pledge To Increase Military Spending
Apart from Germany, other European nations have also pledged to increase military spending. On March 1, Swedish Prime Minister Magdalena Andersson said that the country would increase defense spending following the Ukraine invasion, citing an “increase in the general threat level”. Romanian President Klaus Iohannis also said in early March that the country was planning to increase military spending to around 2.5% of the GDP. The government of Latvia has already approved a hike in defense spending to around 2.5% of the GDP.
France, Finland, and the Netherlands, among other European powers, are also in the process of hiking their military budgets. In late March, the defense ministers of the European Union adopted the Strategic Compass document. The agreement calls for the setup of a 5,000-strong rapid reaction force and new collaborative security projects between EU member states. The interest towards the defense sector has also raised concerns around uncoordinated spending, as highlighted by Michele Nones, an analyst at think tank IAI.
Nones predicts that countries are likely to favor domestic manufacturers for their immediate defense needs, a factor that would serve to push down sentiment around multinational defense stocks. The analyst has noted that the absence of an EU defense fund and confusion around joint EU research and development projects in the defense sector would “slow moves toward commonality”. EU states have several joint projects under development, including the Eurodrone UAV or a new main battle tank project.
Our Methodology
These were picked from a careful assessment of the European defense market. Companies from across the continental Europe were considered with large firms that have a history of excellence in the defense sector preferred for the list.
Photo by Somchai Kongkamsri from Pexels
European Defense Stocks to Buy Now
10. Rheinmetall AG (NETRA:RHM.DE)
Rheinmetall AG (NETRA:RHM.DE) is a German firm that provides technologies for the mobility and defense sectors. Some of the areas in which the firm offers expertise to the defense industry include vehicle systems, weapon and ammunition, electronic solutions, and sensors, among others. The company employs more than 23,000 people and has a market capitalization of around €7 billion. In addition to generating revenue from the defense sector, the company also has a steady business in automotive supply parts.
By 2025, Rheinmetall AG (NETRA:RHM.DE) is targeting sales of €8.5 billion with a 10% return on investment. It is also expanding in markets outside Germany like Australia, UK, Germany, Hungary and the US. On March 21, Morgan Stanley analyst Joseph Ayoola kept an Overweight rating on the shares and raised the price target to EUR 191 from EUR 178. Other investment advisors like Deutsche Bank, UBS, and Berenberg are also bullish on the stock. The firm is expected to be the biggest beneficiary of a massive rise in the German defense budget.
Just like Honeywell International Inc. (NASDAQ:HON), Raytheon Technologies Corporation (NYSE:RTX), and Lockheed Martin Corporation (NYSE:LMT), Rheinmetall AG (NETRA:RHM.DE) is one of the stocks that elite investors have on their radar as geopolitical tensions rise.
9. BAE Systems plc (LSE:BA.L)
BAE Systems plc (LSE:BA.L) is a United Kingdom-based firm that provides defense, aerospace, and security solutions. Some of the electronic solutions that the company provides for the military include electronic warfare systems, navigation systems, electro-optical sensors, military and commercial digital engine and flight controls. Ross Law, an analyst at Berenberg, has estimated that the company generated the most revenue in the European defense sector in 2021 from weapons sales and cybersecurity.
On March 4, BAE Systems plc (LSE:BA.L) was awarded a $125 million contract for services related to the USS Essex. The USS Essex is a Wasp-class Landing Helicopter Dock in service with the United States Navy. On March 3, investment advisory Citi maintained a Buy rating on BAE Systems plc (LSE:BA.L) stock with a price target of GBP 878. Analyst Charles Armitage issued the ratings update. BAE Systems plc (LSE:BA.L) plays a role in the manufacture of the famous F-35 combat aircraft as well.
8. Chemring Group PLC (LSE:CHG.L)
Chemring Group PLC (LSE:CHG.L) is an aerospace and defense firm headquartered in the United Kingdom. The company provides various services to the security industry that include countermeasures, sensors, and energetic solutions. Chemring has a market cap of over $1.2 billion and employs around 2.300 workers. A key tech that the firm markets is sensors able to detect explosive, biological, chemical, radio, or cyber threats. These have been in high demand since the Russian invasion of Ukraine.
On March 10, investment advisory Berenberg maintained a Buy rating on Chemring Group PLC (LSE:CHG.L) stock and raised the price target to 360 pence from 350 pence. The weapons and cybersecurity sales of Chemring Group PLC (LSE:CHG.L) placed it second in a group of top-performing defense stocks in Europe in 2021 according to an analysis by Berenberg. The company has registered two consecutive years of dividend growth and has a yield of 2.17%. The total debt of the firm stands at around $44 million.
7. Thales S.A. (PAR:HO.PA)
Thales S.A. (PAR:HO.PA) is a French defense firm with interests in the aeronautics, space, defense, security, ground transportation, and digital security markets. The stock has jumped in the past few weeks as European nations beef up military spending in the wake of the Ukraine war. On March 3, Thales S.A. (PAR:HO.PA) posted earnings for the fiscal year 2021, reporting a revenue of €16.2 billion, up more than 5% compared to the revenue over the previous fiscal year. The firm forecasts organic growth of around 6% in 2022.
On February 16, Morgan Stanley analyst Andrew Humphrey upgraded Thales S.A. (PAR:HO.PA) stock to Overweight from Equal Weight and raised the price target to EUR 98 from EUR 96, noting that the firm was “a much better investment than the current multiple implies”. The analyst further added that concerns on potentially dilutive mergers and acquisitions had worsened the relative valuation lows of the stock but were “at odds with recent precedent” in this regard.
6. Leonardo S.p.a. (MIL:LDO.MI)
Leonardo S.p.a. (MIL:LDO.MI) operates as an industrial and technology firm with huge stakes in the defense sector. It is headquartered in Italy. The firm is especially famous for the helicopters it manufactures that serve battlefield, combat, maritime, training, and executive purposes. It also offers communications and cyber security services. The firm has over 180 global sites through which it conducts business and is widely recognized as the eighth-largest defense contractor in the world.
On February 16, investment advisory Morgan Stanley maintained an Equal Weight rating on Leonardo S.p.a. (MIL:LDO.MI) stock with a price target of EUR 6.65. Analyst Andrew Humphrey issued the ratings update. Leonardo S.p.a. (MIL:LDO.MI) is a semi-government stock, with 30% of the ownership of the firm in the hands of the Italian authorities. It has over seven decades of experience in the defense sector. The annual yield of the stock lies in the 2%-3% range. The firm has four divisions with at least 50,000 employees in each.
In addition to Honeywell International Inc. (NASDAQ:HON), Raytheon Technologies Corporation (NYSE:RTX), and Lockheed Martin Corporation (NYSE:LMT), Leonardo S.p.a. (MIL:LDO.MI) is one of the stocks that hedge funds are monitoring as the Ukraine war drags on.
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Disclosure. None. 10 European Defense Stocks to Buy Now is originally published on Insider Monkey.
