Bolstering Europe—and your portfolio: European defence comparables
Europe is rearming—fast. With €800 billion on the table, the ReArm Europe Plan is set to reshape the continent’s defense industry. For investors, the real question isn’t whether money will flow, but who will collect the biggest share. Let’s break it down.
Europe is rearming—fast. With €800 billion on the table, the ReArm Europe Plan is set to reshape the continent’s defense industry. For investors, the real question isn’t whether money will flow, but who will collect the biggest share. Let’s break it down.
Europe must strengthen its ability to deter and defend. With Russian pressure on Ukraine and broken trust in Trump’s USA for support, Europe has put forth the €800 billion ReArm Europe Plan to bolster its defense.
Markets have already reacted, with European defense equities rallying. However, the more interesting question is: who will benefit most from this 800 billion in funding? Every sector has winners and losers, but the European defense sector has several key factors that give investors reason to be extra picky with their investments:
- Defense contracts are often big in deal value and long-term, giving winners a strong edge while leaving others behind.
- Once a company’s product is adopted, it has a strong advantage in future contracts, including with other allies—interoperability is key on the battlefield, driving standardization.
- Spending is likely to be disproportionately allocated to pan-European capability domains. The ReArm Europe Plan names the following examples: "air and missile defence, artillery systems, missiles and ammunition drones and anti-drone systems; but also to address other needs from cyber to military mobility."
- Spending is also likely to be disproportionately allocated to companies in European countries with the biggest influence in Europe (e.g. Germany, France). Governments prefer to back homegrown companies, and then often use their political leverage to convince countries with less influence to purchase from these companies to be interoperable.
I took a look at nine companies, split up in two groups:
- Aerospace & Defense Primes - These are big players in the industry with broad integrated offerings across product lines, making attractive partners for large joint defense contracts.
- Defense Electronics, Sensors & Cybersecurity Specialists - These are companies that have significant segments dedicated to threat detection, communications and cyber: pan-European capability domains vital to the European defense strategy. Sharp eyes will notice BAE, Thales, and Leonardo fall into both categories.
Now, for the main course: my free comparables model to help you analyze nine major defense companies and pick your own winners.
Here is the SitRep:
- Comparables valuation: across comparable companies, investors are generally paying approximately 27 times earnings, as reflected in the median LTM P/E ratio of 27. Notably, Rheinmetall AG (107.4x LTM P/E) and Hensoldt AG (80.5x LTM P/E) trade at significantly higher multiples, indicating investor confidence in these companies.
- Margins: net income margins for Aerospace & Defense Primes range between 8-9%, while Defense Electronics, Sensors & Cybersecurity Specialists see slightly lower margins of 5-7%. Notably, Kongsberg Gruppen ASA and Dassault Aviation SA generate higher-than-average net income margins compared to their peers.
- Backlogs: Aerospace & Defense Primes have strong backlogs, with an average of 4.8x and a median of 3.6x annual revenue already secured. While this guarantees revenue stability, it may also limit their ability to take on new orders (e.g., from ReArm Europe). In contrast, Defense Electronics, Sensors & Cybersecurity Specialists have smaller backlogs—averaging 2.3x and a median of 2.7x annual revenue—which gives them more flexibility to secure additional contracts.
- Worth a closer look: Kongsberg Gruppen ASA (KOG). Kongsberg is interesting for its reasonable P/E, strong margins, substantial backlog, and product portfiolio, including air defenses (e.g. NOMADS).
Use this model as a starting point to build your own investment theses. Please reach to me if you're interested in discussing your ideas.
