European Defence Stocks March Ahead: Suited For Momentum Investors Only
European defence stocks have vastly outperformed the S&P 500 this year and so far, show no sign of slowing down. Despite the currency risk, Canadian investors may be able to ride the momentum.
The surge in European defence contractors’ share prices has come thanks to U.S. President Donald Trump, who has long said other members of the North Atlantic Treaty Organization (NATO) have not been paying their fair share of defence costs and rely too heavily on the United States.
The issue came to a head on 28 February 2025, in a live television broadcast of a visit to the White House by Ukrainian President Volodymyr Zelenskyy. President Trump and Vice-President JD Vance "discussed” how further U.S. military aid to Ukraine would be paused. Incredulous investors couldn't believe their good luck and jumped up from their TVs to order shares of European defence contractors, sending the stocks up by more than 20% over the next few days.
The companies in the sector have continued to trade at optimistic multiples since then, buoyed by a near-constant flow of reassuring announcements by European governments. Most of the 32 NATO members have said they will increase their defence budgets, including the United Kingdom, Germany, France, Poland, Spain and many smaller countries.
In March 2025, the European Commission announced its ReArm Europe Plan, which will unlock up to €800 billion in funding for defence spending, along with a new €150 billion loan instrument for countries to use to expand their defensive capabilities. A clause in the plan will allow countries to increase defence spending without breaching EU budgetary restrictions. As well, some institutional investors and asset managers such as Allianz Global Investors, UBS Asset Management and Danske Bank Asset Management have eased some of their environmental, social and governance (ESG) objections against buying into defence companies.
Most recently, President Trump has called for NATO nations to spend at least 5% of their gross domestic products on defence, more than twice NATO’s 2% target and more even, than the U.S. itself. The upcoming NATO summit in the Netherlands on June 24-25, 2025, will likely see even more European nations confirm plans to spend more on defence.
The expected flood of long-term, reliable government contracts should translate into higher revenue and earnings for aerospace and defence companies such as BAE Systems PLC of Britain, Thales SA of France, Germany’s Rheinmetall AG, Sweden’s Saab AB and Italy’s Leonardo SpA. Although they compete for contracts, it’s common for the companies to enter into joint ventures, and for equipment manufactured by one company to include components made by others.
The on-again, off-again tariffs imposed by President Trump will likely have little impact on European defence contractors as they had established, and in many cases expanded, their U.S. facilities in anticipation of Mr. Trump’s election, says a 7 April 2025 report from Morningstar analyst Loredana Muharremi.1
Enthusiasm for shares of European defence contractors makes them suited for momentum investors, and not for those seeking deep value or those waiting for a turnaround. A good measure of optimism is the P/E to growth (PEG) ratio, the current P/E ratio divided by a company’s long-term rate of earnings growth. A company with a P/E of 30 and a growth rate of 20% would have an optimistic PEG of 1.5, while a company with a P/E of 20 and a growth rate of 30% would have a pessimistic PEG of 0.66.
Canadians will have to invest in these companies via American Depository Receipts (ADRs), which means accepting double currency risk, as the shares of the European defence companies trade in their currencies, which are then converted to U.S. dollars via ADRs. Fluctuations in either the original currency or the U.S. dollar against the Canadian dollar will affect returns.
Rheinmetall, Thales and Leonardo use the euro as their base currency, while BAE Systems uses the pound sterling and Saab uses the Swedish krona. All three currencies fell to lows against the U.S. dollar in January 2025 before rallying to much higher levels in April. Most of the ADRs trade on the U.S. over-the-counter market.
Here is a closer look at some European defence contractors whose ADRs are worth considering.
Rheinmetall AG (RNMBY)
Düsseldorf, Germany-based Rheinmetall’s defence business, which includes military trucks, armoured vehicles, heavy weapon carriers and ammunition, accounted for about 80% of its sales last year. Almost half of its sales went to other European countries, with Germany representing about 30%. The company’s order backlog reached €55 billion at the end of 2024.
Preliminary figures for its first quarter showed the company’s military sales jumped by almost 73% over the first quarter of 2024, with total sales increasing by 46%. Operating profit for the company was about 8.7%, fully 49% higher than in the same quarter a year ago, with operating profit from the company’s defence business almost doubling. The company said it expects revenue for 2025 to come in at 25%-to-30% more than 2024 levels, with an operating margin of about 15.5%. “This outlook does not yet take into account the improvement in market potential that is likely to arise,” the company said.
As of mid-May Rheinmetall’s ADRs were trading at almost three times the US$125 they sold for at the beginning of the year. At its recent price Rheinmetall has a market capitalization of US$80.5 billion and a trailing 12-month P/E ratio of 92.7. The company’s strong growth, however, means its five-year P/E to growth (PEG) ratio is only 1.3, figures from Yahoo Finance show.
BAE Systems PLC (BAESY)
Based in London, BAE is regarded as Europe’s largest defence contractor, with 107,000 employees in more than 40 countries, turning out submarines, frigates, combat vehicles and munitions. The company is the largest defence contractor in the U.K. and Australia, and among the top 10 prime contractors to the U.S. Department of Defense, which represents 44% of revenue. The company’s order backlog is at a record high, as long-term contracts with governments provide a relatively secure flow of revenue.
In its 2024 annual report, BAE reported that its order backlog had grown by 11% over 2023, while sales had increased by 14% and earnings had climbed 10% from 2023, while operating profit, which rose 4%, was tempered by costs related to mergers and acquisitions. The company said it expects 2025 sales to climb by between 7% and 9% and for earnings per share to rise by 8% to 10%. The company raised its dividend by 10%, its 19th consecutive year of dividend increases.
At a recent ADR price of US$93, the company has a market capitalization of US$66.3 billion and a trailing 12-month P/E ratio of 26, with a five-year PEG ratio of about 4.65, reflecting extreme investor optimism, figures from Yahoo Finance show.
Saab AB (SAABY)
Based in Stockholm, Sweden, Saab is perhaps best remembered for its car division, which stopped production in 2011 and was eventually sold off. Today more than three-quarters of its sales come from the defence sector. Although it has overseas customers, more than half of its sales come from Europe and the Swedish armed forces are its biggest client.
For the first quarter of 2025, Saab reported that net income and earnings per share had grown by 64% over the same quarter of 2024, with organic sales growth of 11%. For the rest of the year, the company says it expects organic sales growth of between 12% and 16%, with operating income growing at an even higher rate.
Saab’s ADRs have more than doubled this year and now trade at levels that give the company a market capitalization of US$25.5 billion, with its shares trading at more than 50 times trailing earnings and almost 45 times forward earnings per share. Saab’s five-year expected PEG ratio is an optimistic 1.93, figures from Yahoo Finance show.
Thales SA (THLLY)
Paris-based Thales is one of Europe's largest aerospace and defence contractors with €20.6 billion in 2024 sales. In the first quarter of 2025, the company’s defence segment represented 54% of sales, with aerospace representing 27% and cyber/digital accounting for 18%.
Thales’s Q1 2025 order intake fell by 25% compared to a banner Q1 of 2024 when the company recorded two huge orders. Sales in the company’s defence segment rose by 16.5% in the quarter, helping overall sales rise by more than 12%.
Thales’s ADRs have almost doubled this year and now trade at levels that give the company a market capitalization of US$58 billion, with its shares trading at more than 50 times trailing earnings and 25 times forward earnings per share. Thales's five-year expected PEG ratio is an optimistic 2.26, figures from Yahoo Finance show.
Leonardo SpA (FINMY)
Rome-based Leonardo, known as Finmeccanica until 2017, produces jets, helicopters, unmanned aerial equipment and other military equipment, with a focus on joint ventures with other companies. About 30% of its shares are owned by the Italian government.
Leonardo’s order book grew by 12.1% to €20.9 billion in 2024 and should grow by 17% to €26.2 billion in 2029, the company’s industrial plan says. Revenue of €17.8 billion in 2024 should grow by 27% to €24.0 billion in 2029, it adds. The company has dramatically increased its dividend to yield about 1.7% this year.
Like Thales, Leonardo's shares have almost doubled so far this year, producing a market cap of US$31.2 billion, while its shares trade at about 26 times both trailing and forward earnings. Leonardo’s five year expected PEG ratio is 1.44, figures from Yahoo Finance Show.
Summary
In summary, the most promising European defence stock appears to be Rheinmetall AG (RNMBY) based on the company's own projections and the fact that its five-year forward PEG is not overly optimistic when compared to those of its competitors. Rheinmetall's robust growth in orders and revenue and high operating margins are also solid characteristics. As a final catalyst, Rheinmetall's rising shares have lifted its market capitalization to the point where it may soon be a member of large-cap stock indexes such as the Euro Stoxx 50, making it a candidate for institutional investors who must focus only on the largest of companies.
Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post. richarddmorrison@yahoo.ca
1 https://www.morningstar.co.uk/uk/author/3377/loredana-muharremi.aspx