They say that when you see a bubble, you should run towards it, not away from it. I think I first heard it from Peter Benson. At the moment, basically all stocks that have some kind of focus on Defense are going like a rocket and their journey to the moon doesn’t seem to want to be stopped. Here I have compiled the alternatives that exist among the European defense stocks. Is there any upside left?

A special “bubble”

When the IT bubble of the 2000s entered our lives, all companies would mention their future in IT. When AI recently became hot, it was time for all companies to show what success they could reap in the area.

It is not as easy for companies to show in their reports what they are doing in the defense segment. This is my own reflection anyway. I am not saying that the defense sector is a bubble, but at least the valuations have risen as I write about them little further down.

A huge market awaits

America’s recent actions have completely redrawn the map of the European defense market. This is an extremely difficult situation to predict and every day brings new information that affects the conditions. At least it is clear that Europe needs to manage its own security to a much greater extent than it has done before.

There is currently talk of a decade where heavy investments will shape European defense in various ways. The new defense plan from the European Commission could free up SEK 9,000 billion to improve and strengthen.

Right now, it looks like European defense companies will have their hands full for the foreseeable future, probably regardless of how the Ukraine war goes.

Recently, news came from Friedrich Merz (the newly appointed German Chancellor) that his plans are to change the German budget rules (soon more on this in a speparate article) in order to enable even greater investments in German defense.

There has also been discussion about NATO raising the target that its member countries should spend at least 2% of GDP on defense. For example, NATO Chairman Mark Rutte believes that 3% is not even enough.

The stock market’s defense stocks

Here is a compilation of the most popular defense stocks with a summary of what you’re dealing with. I also look at how they are valued and which ones can grow the best.

Please note that only European defense stocks are included. As I said, Europe has become a hot topic in defense, so I think it is appropriate here and now.

Saab

Saab is an obvious candidate (as I live in Sweden so my 1st prio) and is Sweden’s largest defense group. It has been a while since the company stopped manufacturing passenger cars and is now one of the European defense stocks that provides the largest share of defense based on its turnover.

Saab is an important partner to the Swedish Armed Forces and the Swedish Defence Materiel Administration (FMV).

In 2024, 41% of the company’s revenue came from Sweden, a decrease of 1 percentage point from the previous year. The second largest source is Europe. Saab’s Swedish revenue corresponded to approximately a quarter of Sweden’s total defense budget during the year.

The company develops products and systems for the air force (Saab 39 Gripen), the navy (submarines, surface ships, combat boats) and the army (air defense systems, anti-tank weapons). It also supplies key products such as sensors, radar technology and electronic warfare systems.

I do not own Saab myself, but I do own Investor, which is the company’s main owner (about 30% of the capital).

There has been some speculation about Saab’s current valuation – whether it is justified or not. One thing I know has been discussed is that Saab is developing very advanced weapons systems where the investments themselves are actually too heavy to be borne by Sweden. Here I return to the turnover within Sweden. In addition, Saab has historically been quite poor at achieving success when it comes to exports.

What I can personally say is that the rockets in defense have gone in stages. First there was a rocket when Ukraine and Russia went to war. Then there has now been additional rocket fuel when the US got into the game. It is difficult to say what will happen next, but the valuations are high. If the defense companies can maintain their growth in the future, you will grow into that suit well.

BAE Systems

This is probably Europe’s leading defense giant, involved in some of the largest defense projects. It is also the largest in Europe with close to 110,000 employees globally.

Almost all of the turnover comes from defence products. Examples of major projects are the American F-35 fighter jet and the European Eurofighter cooperation project.

In Sweden, BAE is probably best known for owning parts of the old Bofors, which includes the Archer artillery system. It also owns parts of Hägglunds, with the CV90 armored vehicle.

BAE Systems is listed on the London Stock Exchange.

German Rheinmetall has clearly had the best price hike since the outbreak of the war with an increase of over 1000%. This is a manufacturer of defense equipment with a main focus on ground combat troops. Here we see, among other things, the very well-known Leopard 2 tank that Sweden uses.

The company has a long and rich history and was founded back in 1889. Today, it has manufacturing in 28 countries, but mainly in Germany.

Leonardo is Italy’s representative in the defense sector. Last year it had a turnover of 18 billion EUR and approximately 54,000 employees, half of whom work in Italy. The majority of sales are made up of fighter jets and helicopters.

The company was formed shortly after World War II when Italy decided to raise the standards of its army. A number of different defense players merged to form a state-owned company called Finmeccanica.

It was actually only 9 years ago that the company changed its name to Leonardo after the artist Leonardo Da Vinci.

There is so much defense in the companies

Many of the defense companies are not only involved in defense, but their operations span other sectors. Therefore, it can be interesting to see which are more “pure” defense companies than others. Here they are sorted by defense’s share of turnover in the past year.

Just as I mentioned above, BAE is the most concentrated defense company, but interestingly, Saab comes in second place.

Company	Defense percentage of turnover
BAE Systems (PLC)	98%
Saab	90%
Leonardo	75%
Babcock (PLC)	74%
Rheinmetall	71%
Dassault Aviation	62%
Thales	52%
Kongsberg	39%

Which defense company is doing best?

There’s no question that Rheinmetall has performed the best of all defense stocks. I’ve never really speculated on why, but it might have something to do with the valuation they had before all the glory started.

Company	Return 1 year %
Rheinmetall	180%
Kongsberg	130%
Leonardo	122%
Saab	80%
Thales	71%
Dassault Aviation	65%
Babcock (PLC)	39%
BAE Systems (PLC)	27%

This is how defense companies are valued. Which is the cheapest?

Here are current valuations based on earnings estimates for 2025. The data comes from Factset’s estimates and is based on many analysts’ expectations for future earnings.

To clarify, P/E measures the share price in relation to earnings. EV/EBIT, on the other hand, also takes into account debt by looking at market capitalization plus net debt instead of just market capitalization as P/E.

Company	P/E 2025E	EV/EBIT 2025E
Kongsberg	42.7x	33.1x
Rheinmetall	38.7x	26.1x
Saab	37.8x	28.7x
Thales	25.2x	18.9x
Leonardo	24.8x	18.6x
BAE Systems (PLC)	21.1x	16.7x
Dassault Aviation	20.8x	21.9x
Babcock (PLC)	14.0x	10.6x

Which are expected to grow the most?

If you are valued highly, expectations for future growth should also be high. My own reflection is that Kongsberg has the highest valuation but is expected to grow the least. The reason is probably that we have to take many other factors into account.

Company	Annual growth 2025E-2026E %
Rheinmetall	28%
Dassault Aviation	19%
Kongsberg	16%
Saab	16%
BAE Systems (PLC)	12%
Thales	6%
Leonardo	5%
Babcock (PLC)	4%

What conclusion do I draw?

It is easy to believe that the train has already passed for defense stocks if we look at both the development of share prices and also the valuations. In the event that all the geopolitical unrest continues, it is not high, as the companies will thrive in money in the future. I think that is worth remembering.

If the situation escalates further from the current level, then we will see further large increases. I have difficulty analyzing how these macro factors will develop, so I’m content with Saab via Investor right now.

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