Defense stocks rose in Europe as Germany is expected to approve a contribution of over 50 billion euros to the military.
The money is earmarked for, among other things, equipment, vehicles, and air defense. Investors were enthusiastic, as the decision promises more orders for defense companies, which have already risen significantly this year.
Michael Field, chief equity strategist at Morningstar, told CNBC’s “Squawk Box Europe” on Wednesday that the expected news out of Germany was “good in many ways.”
“Normally these things take some time to get through government, but the process seems to be speeding up which is good news for these companies,” he said, adding that the money reportedly earmarked for military protective equipment showed the German government would have to spend huge amounts to catch up after years of underspending.
Order-intake during the year of more than 3x expected 2025 revenue versus original guidance of c.2x
Total backlog (including options) of c.€2.4 bn, being more than 2x vs year-end 2024, despite the record year in deliveries, and providing significant revenue visibility over the medium-term
Contract Revision between OCCAR and THEON/Hensoldt consortium in December representing largest single procurement of NVGs in the history of a European NATO member
Securing of the supply chain through extension of long-term commercial agreement with Exosens and delivering capacity increases at both Harder Digital and Exosens
Significant €25 m order secured by Harder Digital for Gen 3 Image Intensifier Tubes (IIT), underscoring confidence in Harder’s production ramp-up and enhanced output quality following recent investments
Sequence of strategic investments, acquisitions and partnerships, including a pivotal 9.8% stake in Exosens (its importance underscored by the material orders subsequently secured in Q4), creating a platform to drive the development of next-generation soldier systems
Announced the construction of a new facility for the production of platform-based products, following the first order for the newly introduced vehicle-mounted stabilized system from a leading armored vehicle manufacturer
Successful completion of €150 m Rights Issue, supporting a robust balance sheet and deleveraging to well below target of Net Debt/ EBITDA <2.5x
Full confidence in both FY 2025 and FY 2026 guidance, with FY 2026 representing 30% YoY revenue growth of which 20% organic
Revenue contribution from new digital products anticipated to more than double YoY in FY 2026, and reach c.25% with the inclusion of Kappa, with new products introduced to-date significantly increasing THEON’s total address market
Entering 2026 with strong momentum: market dynamics supporting elevated levels of demand and moving to long-term frame agreements; material contributions from new products portfolio; and pursuit of organic growth above forecasted 15% industry growth rates supplemented by further M&A, all providing excitement for the future
Snapped up a slice of a US company called AeroVironment for my portfolio, which receives nothing but BUY recommendations from analysts. It is one of the defense sector stocks found in door 18 of Arvopaperi’s [advent calendar].
Addition: Two other defense companies besides AeroVironment are
Exail Technologies, which develops robotics and navigation systems for use in, for example, aviation and maritime.
Leonardo DRS Currently, the company is listed on the New York Stock Exchange, and it primarily serves the United States Armed Forces. Products include aircraft systems used in training, heavy equipment logistics, and drones.
In the article below, the author states that, in their view, defense sector stocks still have strong upside potential.
According to them, geopolitical uncertainty and increasing defense spending are boosting the sector both now and in the near future. They estimate that shifts in security policy and distributed deterrence will increase the sector’s attractiveness next year as well, and the article highlights five particularly promising stocks: Huntington Ingalls Industries, BAE Systems, Rheinmetall, Lockheed Martin, and BWX Technologies.
As geopolitical uncertainty rises, many finance pros have homed in on the defense sector
Scott Helfstein of Global X ETFs thinks a handful of stocks in the sector are poised to soar.
He shared his top five defense stock picks for the coming year.
Here is a piece by Juho Toratti regarding KNDS, which is planning to list
KNDS N.V. is undeniably one of the leading players in the European defense sector. The merger of two companies specializing in land forces equipment created a player whose tanks are the most sought-after in Western Continental Europe. KNDS’s position is strengthened by an increasing ownership stake in Renk Group, which develops heavy transmission systems. With active product development and a focus on continuous growth investments, the company certainly has the potential to capture a larger market share in international defense markets. In news concerning a possible IPO, KNDS’s valuation has been estimated at around 20 billion euros, meaning this is not exactly a small-scale listing.
As things stand, Finnish investors will likely be left empty-handed anyway, as the shares of this traditional German-French company will likely only be offered to private investors in those specific countries if a public offering is organized. Thus, it will only be possible to pick up the stock from Finland once trading begins. While this scenario is the most likely in our view, it remains possible that KNDS will organize a public offering marketed extensively across Europe.
Henri Vanhanen and @Renato_E_Rios have written a very comprehensive and interesting piece on the outlook for the European defense sector.
Europe is undergoing a defense awakening after years of inadequate investment, and budgets are being drafted assuming prolonged geopolitical tension will continue, rather than assuming a quick return to the pre-2022 situation. Even if some current conflicts ease or peace negotiations progress, commitments to replenishing stockpiles, strengthening air and missile defense, and achieving higher NATO and EU spending targets point toward a multi-year demand wave instead of a short spike. Capacity has lagged behind demand growth, but order backlogs and revenues have still grown strongly. Valuations look demanding for some names and more reasonable for others, and current prices incorporate very different assumptions about the length and profitability of the current cycle.
Subheadings:
Public spending driving defense markets is political in nature and often favors local players
Europe woke up to defense and is planning budgets for long-term deterrence
The European defense industry lags behind budget growth, and utilizing spending in Europe is not straightforward
As Europe arms itself, the market re-rates the defense sector from a post-Cold War discount to a structural premium
Three paths for spending development and their assumptions
From larger order backlogs to sustainable shareholder value: Distinguishing winners and passengers in the Nordic defense sector
Saab (market cap 270 BSEK) – Nordic full-spectrum prime, turning European rearmament into multi-year growth
Bittium (market cap 720 MEUR) – Finnish secure communications specialist scales with NATO-level tactical networks
W5 Solutions (market cap ~900 MSEK) – Leveraging current demand dynamics through training, integration, and power supply
MilDef (market cap 6.5 BSEK) – Sustainable tactical IT from defense digitalization
Scandinavian Astor Group (market cap 1.6 BSEK) – Small Swedish defense platform scaling with the cycle
INVISIO (market cap 12.5 BSEK) – Niche segment military communications provider benefits from a long upgrade cycle
Argo Defence Group (market cap 330 MSEK) – Small FMV-focused platform with multi-year framework agreement visibility
Lockheed Martin secured several contracts totaling approximately half a billion dollars. The contracts cover, among other things, the maintenance of the AEGIS Combat System and the integration of a new version, technical support for the MK 41 Vertical Launching System, and THAAD missile defense maintenance for the United Arab Emirates. These will provide work for several years.
In my view, someone investing in defense stocks now would need to believe (hope ?) that the war in Ukraine—and with it, the extremely profitable demand for ammunition for companies like Rheinmetall and Saab—does not come to an end.
In addition, one must believe that Europe will arm itself to the teeth from now into the distant future. Looking at European history from, for example, 1000 BCE to the present day, this is not necessarily an unrealistic expectation, but the industry is cyclical, as the writers remind us. If Russia were to ever attack a NATO country, or if NATO collapses, just an EU country, it would be a money-making opportunity for arms manufacturers.
To top it off, one would hope that politicians do not interfere with the profitability of companies in the sector. Already now, one can ask whether ammunition production can be that profitable using taxpayer money and whether companies should share more of the burden of public finances.
On the other hand, the future can be unpredictable in many ways. The “special operation” in Ukraine was hard to foresee because the attempt seemed so nonsensical, but the world is not governed with much wisdom, as Oxenstierna once sighed to his uncertain son to encourage him during the peace negotiations of the Thirty Years’ War. “Surprising” periods of peace are also a possibility.
This, without a doubt, adds fuel to the sentiment and narrative that are already running wild. I wrote a post on the Saab thread touching upon the unfolding of recent events. I also allude to the topic of the pricing of risk (or events) and how that typically is wrong (related to a broader theme that I have raised before in earlier post). European defense stocks trade on a sentiment and narrative basis lately, so these are broad points underlying the sector price discovery dynamics
Trump says that US defense contractor executives should not earn more than 5 million dollars unless the companies build new and modern production facilities.
He also claims he will ban dividends and share buybacks from companies in the sector until delivery and maintenance problems are fixed and investments increase.
The goal is to speed up the production of weapons and spare parts as well as maintenance to meet the needs of allies quickly.
President Donald Trump wants the US defense budget to be raised to 1,500 billion dollars. Defense spending for the current fiscal year is 901 billion dollars.
News agency Bloomberg writes that this would be the largest increase in US defense spending of all time.
The whole thing looks a bit like Jared Kushner was in need of some pocket money, so they pulled this little maneuver. Within the same day, the defense sector is first spooked, and then a massive increase to the budget is promised.
Here are Marianne’s macro comments on, among other things, European defense spending.
In Europe, including in the corridors of Brussels, there are whispers about the opportunities the defense industry brings to the economic growth outlook. Many promises regarding these are still to be fulfilled, and defense spending needs more extensive economic support behind it.
There’s probably no point in grumbling from your sofa; the message won’t reach the decision-makers anyway
I think Europe should put more effort into new defense technology; traditional ammunition is also needed, but as we can see in Ukraine, it’s not enough on its own.
Europe has a golden opportunity to develop robotics (even if it sounds ominous), AI drones, automation, etc.
The Americans aren’t actually that far ahead. Especially in the field of microchips, Finland would have a lot to offer. These are needed, for example, when AI is packed into a small space in a drone.
But, as I suspect, they’ll just buy a lot more tanks. Our eyes should be on the changing world and how to defend against it—not how to attack.
This reflects EU decision-making well. Whispers in the corridors of Brussels and “requires broader economic support behind it” while on the other side of the ocean, essentially “one person” decides that something is going to be done, and then the action starts. In Europe, we are left totally stuck in the starting blocks right from the beginning because decision-making is slow and there are always people putting on the brakes.
I wouldn’t stay around waiting for much more than crumbs to trickle outside the US from that massive and doubled US defense budget. It is protectionism that drives capital to stay within US borders. And of course, for the future of the entire US, it is important that the defense industry as a sector (companies, know-how, innovations) remains within the country’s borders.
“President Donald Trump wants the US defense budget to be raised to 1,500 billion dollars. Defense spending for the current budget year is 901 billion dollars.”
“The news agency Bloomberg writes that this would be the largest increase in US defense spending of all time.”
You are right. This will stay inside the four walls of the forum. Still, it is a useful discussion to have!
I also agree that Europe should invest more time, energy, and money into advanced defense tech. That is by and large already happening, but probably not to the degree that is necessary. The likely “next generation” of defense suppliers includes smaller, more asset light players in drones, autonomy, and automation.
The big primes see the same thing, which is why they are trying to stay ahead through acquisitions and partnerships, then folding that tech into their offerings. The catch is integration. These faster, asset light newcomers typically run on short iteration cycles, different talent incentives, and a different risk appetite than a large regulated prime (prime=large defense contractor). Sometimes the cultural and operational gap is simply too wide for a clean plug in, which is why not every acquisition will work, and why some of the most interesting innovation may stay outside the traditional prime structure.
?) that the war in Ukraine—and with it, the extremely profitable demand for ammunition for companies like Rheinmetall and Saab—does not come to an end.
