Deep Dive Into European Defense Stocks: What the Numbers Reveal
European defense stocks have re-rated faster than almost any sector on the continent since Russia's invasion of Ukraine in February 2022. Rheinmetall quadrupled. BAE Systems doubled. Thales, Leonardo, and Saab all set multi-year highs. The question for a value investor is not whether these businesses are good. They are. The question is whether the prices paid today still make sense given the fundamentals, and where the remaining value sits.
This post runs the numbers on the six most significant European defense names, compares them against their U.S. peers on EV/EBITDA and P/S ratios, and explains what NATO's 2% GDP target means for revenue trajectories over the next five years.
Key Takeaways
- European NATO members collectively underspent on defense for decades. The 2% GDP commitment, now binding under 2024 NATO agreements, adds an estimated $120 billion in annual spending once all members comply.
- Rheinmetall (RHM) trades at an EV/EBITDA near 22 as of Q1 2026, a significant premium to U.S. peer Northrop Grumman at 16.8, reflecting exceptional growth expectations.
- BAE Systems (BA.L) remains the most attractively valued large-cap European defense name at an EV/EBITDA near 14.5, a P/S ratio of 1.4, and a dividend yield above 2%.
- Thales SA (HO) offers the strongest technology mix of any European defense name, with cybersecurity and digital identity revenues providing non-defense diversification.
- Saab AB (SAAB-B) is the purest expression of the European defense rearmament thesis, with 85%+ of revenue from defense and a backlog-to-sales ratio above 4x.
- Run any of these names through our screener using EV/EBITDA and debt-to-equity filters to see how they compare to the full global defense universe.
The Spending Backdrop: Why This Sector Is Growing
NATO's 2024 Washington Summit updated the 2% GDP target from a guideline to a formal collective defense obligation. As of the end of 2025, 23 of 32 NATO members had reached or exceeded 2% of GDP. The remaining nine, including Belgium, Italy, and Spain, have committed to reach compliance by 2028.
The arithmetic: Europe's combined GDP is approximately $23 trillion. Moving from the 2024 average of 1.93% to the full 2% target represents roughly $16 billion in incremental annual spending. Full compliance for all laggards adds another $40-50 billion per year. That spending flows almost entirely to domestic contractors, because NATO procurement rules require member-country industrial participation.
German rearmament is the single largest tailwind. Germany announced a special defense fund of 100 billion euros in 2022 and has since committed to sustained spending above 2% of its roughly $4.5 trillion GDP, approximately 90 billion euros per year. Rheinmetall, headquartered in Dusseldorf, is the primary beneficiary.
Rheinmetall: Best Growth Story, Premium Price
Rheinmetall (RHM) is best known for its Lynx infantry fighting vehicle, Panther tank program, and artillery ammunition production, but it is also rapidly expanding into drone systems, air defense, and military vehicles through a joint venture with Leonardo.
Revenue has grown from 5.9 billion euros in 2021 to an estimated 12.4 billion euros in 2025, a compound growth rate above 20%. That growth rate is real, driven by order wins and production ramp-up, not accounting adjustments.
| Metric | Rheinmetall (RHM) | BAE Systems (BA.L) | Northrop Grumman (NOC) |
|---|---|---|---|
| EV/EBITDA | 22.1 | 14.5 | 16.8 |
| P/S Ratio | 2.8 | 1.4 | 1.6 |
| Operating Margin | 14.2% | 11.8% | 11.4% |
| Debt-to-Equity | 0.4 | 0.8 | 1.1 |
| Dividend Yield | 0.8% | 2.1% | 1.6% |
| Backlog-to-Revenue | 5.1x | 3.2x | 4.4x |
Rheinmetall's debt-to-equity of 0.4 is the cleanest balance sheet in the peer group. But the valuation demands near-flawless execution. At EV/EBITDA of 22, the market is pricing in 5-7 more years of 15%+ EBITDA growth. Any contract delay, raw material cost pressure, or production bottleneck that disrupts that trajectory will compress the multiple rapidly.
BAE Systems: The Value Case in European Defense
BAE Systems (BA.L) is the argument that the best European defense stock does not have to be the most expensive one. BAE is the UK's largest defense contractor, generating roughly 28 billion pounds in revenue across naval ships, armored vehicles, combat aircraft (Typhoon), and electronic warfare systems.
The EV/EBITDA of 14.5 sits at a 35% discount to Rheinmetall and a meaningful discount to most U.S. peers. The P/S ratio of 1.4 matches Northrop Grumman at 1.6. Yet BAE has several advantages Northrop does not: geographic diversification across the UK, US, Australia, and Saudi Arabia, and commercial cyber and intelligence services that generate recurring revenue independent of hardware cycles.
The UK's October 2025 defense review committed to spending 2.5% of GDP by 2027, the highest level since the Cold War. BAE captures approximately 45% of all UK defense procurement spend. That is a durable structural position.
Thales: Where Defense Meets Digital
Thales SA (HO) occupies an unusual position. It is a defense company with 56% defense revenue and 44% civilian revenue from air traffic management, digital identity, cybersecurity, and avionics for commercial airlines. That dual revenue profile makes Thales harder to value than pure-play defense names, but it also reduces the political and budget cycle risk that affects pure defense contractors.
The cybersecurity and digital identity segment (Thales DIS, formerly Gemalto) has grown at a compound annual rate above 8% over three years. As defense procurement increasingly moves toward software-defined systems, this expertise is increasingly relevant to government customers, not just commercial ones.
EV/EBITDA for Thales sits near 16.2, roughly in line with BAE when adjusted for the civilian revenue mix. Debt-to-equity of 0.6 is manageable. The 1.8% dividend yield provides a baseline return while you wait for the cyber segment to be recognized in the valuation.
Saab: Pure Play on European Rearmament
Saab AB (SAAB-B) is the Swedish aerospace and defense group behind the Gripen fighter, the Carl-Gustaf recoilless rifle, the GlobalEye airborne early warning system, and a growing portfolio of submarine and surface vessel systems. With Sweden now a NATO member, Saab moves from being a neutral country's defense contractor to a full NATO industrial partner.
Revenue was 27.7 billion Swedish kronor in 2024 (approximately $2.5 billion). Small relative to BAE or Rheinmetall, but growing at 18% per year with a backlog-to-revenue ratio above 4x that implies years of contracted work. The P/S ratio near 2.1 is elevated relative to historical norms, but the backlog quality and NATO membership tailwind justify a premium over the pre-2022 Saab trading range.
Leonardo and Airbus Defense: The Complex Cases
Leonardo (LDO) is the Italian aerospace and defense group. Revenue is split among helicopters (AgustaWestland), electronics, cyber, and aircraft programs. The Italian government owns a 30% stake, which creates political stability but also limits independent strategic decision-making. EV/EBITDA near 12.5 makes it the cheapest large European defense name on that metric, but the complexity of the shareholder structure and Italy's fiscal constraints are genuine risks.
Airbus (AIR) is primarily a commercial aviation company. Its defense division, Airbus Defence & Space, generates roughly 11 billion euros in revenue from military transport aircraft (A400M), Eurofighter, and satellite systems. But at 14% of total Airbus revenue, defense is not the dominant driver of the stock. Buying Airbus for European defense exposure means you are also buying Boeing-competitor commercial aviation exposure, which has a completely different demand cycle.
Valuation Summary: European vs. U.S. Defense
| Company | Country | EV/EBITDA | P/S | Debt-to-Equity | 5-Year Revenue CAGR |
|---|---|---|---|---|---|
| Rheinmetall (RHM) | Germany | 22.1 | 2.8 | 0.4 | 21.3% |
| BAE Systems (BA.L) | UK | 14.5 | 1.4 | 0.8 | 8.2% |
| Thales (HO) | France | 16.2 | 1.7 | 0.6 | 7.9% |
| Saab (SAAB-B) | Sweden | 18.3 | 2.1 | 0.5 | 17.6% |
| Leonardo (LDO) | Italy | 12.5 | 0.9 | 0.7 | 5.4% |
| Lockheed Martin (LMT) | USA | 15.9 | 2.0 | 1.4 | 4.8% |
| Northrop Grumman (NOC) | USA | 16.8 | 1.6 | 1.1 | 6.1% |
The conclusion from this table: European defense names at the growth end (Rheinmetall, Saab) are now more expensive than U.S. peers. European names at the value end (Leonardo, BAE) are cheaper. The re-rating has not been uniform. There is still relative value in the European defense sector, but it requires selectivity.
Further reading: SEC EDGAR · FRED Economic Data
Why European aerospace companies Matters
This section anchors the discussion on European aerospace companies. The detailed treatment, formula, and worked examples appear in the body of this article above. The points below summarize the most important takeaways for value investors who want to apply European aerospace companies in real portfolio decisions. ValueMarkers exposes the underlying data on every covered ticker via the screener and stock profile pages, so the concepts in this article translate directly into actionable filters.
Key inputs for European aerospace companies
See the main discussion of European aerospace companies in the sections above for the full treatment, including the inputs, the calculation methodology, the typical sector benchmarks, and the most common pitfalls to avoid. The ValueMarkers screener lets value investors filter the full universe of 100,000+ stocks across 73 exchanges using European aerospace companies alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
Sector benchmarks for European aerospace companies
See the main discussion of European aerospace companies in the sections above for the full treatment, including the inputs, the calculation methodology, the typical sector benchmarks, and the most common pitfalls to avoid. The ValueMarkers screener lets value investors filter the full universe of 100,000+ stocks across 73 exchanges using European aerospace companies alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
Related ValueMarkers Resources
- Ps Ratio — Glossary entry for Ps Ratio
- Enterprise Value to EBITDA (EV/EBITDA) — Enterprise Value to EBITDA is the metric used to how cheaply a stock trades relative to its fundamentals
- Debt To Equity — Glossary entry for Debt To Equity
- Defense Stocks — related ValueMarkers analysis
- Best Defense Stock — related ValueMarkers analysis
- Residual Income Model For Stock Valuation — related ValueMarkers analysis
Frequently Asked Questions
what stocks to buy
There is no universal answer to what stocks to buy because the right stock depends on your time horizon, risk tolerance, and existing portfolio composition. For European defense specifically, BAE Systems and Leonardo offer the most conservative entry points on valuation metrics in early 2026. Rheinmetall and Saab are better fits for investors willing to pay a growth premium. Run names through our screener to check EV/EBITDA, P/S, and debt-to-equity relative to sector medians before deciding.
what are penny stocks
Penny stocks are shares trading below $5 per share, typically in small or micro-cap companies with limited financial history, low trading volume, and higher price manipulation risk. None of the major European defense stocks qualify as penny stocks. Rheinmetall trades near 600 euros per share, BAE Systems near 14 pounds per share. The defense sector at the large-cap level is the opposite of the penny stock universe in terms of contract stability and reporting transparency.
what are the best stocks to buy right now
The best stocks to buy right now are the ones that trade below your estimate of intrinsic value with a margin of safety, and where the business quality is high enough to survive a period of being wrong about timing. Among European defense stocks in Q1 2026, BAE Systems and Leonardo stand out on valuation, while Saab stands out on growth visibility. The answer depends on whether you prioritize current price relative to value or future growth potential.
what is eps in stocks
EPS stands for earnings per share. It is calculated by dividing a company's net income by the number of shares outstanding. If Rheinmetall earns 2 billion euros in net income and has 100 million shares outstanding, its EPS is 20 euros. Growth in EPS over time is one of the cleanest signals of a company compounding value for shareholders. For European defense stocks, EPS growth has been strong since 2022, but at current valuations the forward EPS growth implied by current prices is ambitious.
what is beta in stocks
Beta measures how much a stock's price tends to move relative to the broader market. A beta of 1.0 means the stock moves roughly in line with the market. A beta above 1.0 means it moves more than the market in both directions. European defense stocks have historically had betas between 0.6 and 0.9, meaning they are less volatile than the overall market. Since 2022, the betas for names like Rheinmetall and Saab have risen toward 1.2-1.4 as trading volumes and institutional interest increased.
what are blue chip stocks
Blue chip stocks are shares in large, financially stable, and well-established companies with a long track record of consistent performance. BAE Systems, Thales, and Leonardo qualify as European defense blue chips based on market capitalization above 10 billion euros, consistent profitability, and decades of government contract relationships. Rheinmetall is transitioning from mid-cap to blue chip status as its market cap has grown above 25 billion euros, driven by the rearmament cycle.
Use our screener to filter European defense stocks by EV/EBITDA, P/S ratio, and debt-to-equity simultaneously, and compare them against their U.S. peers in the same view.
Written by Javier Sanz, Founder of ValueMarkers. Last updated April 2026.
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