From Morningstar: 2024-07-10 05:25:00

In the first half of 2024, the European defence sector faced challenges due to underinvestment, leading to supply chain issues. European countries struggled to support Ukraine while maintaining their own supplies, especially for munitions. However, NATO countries are increasing defense spending by 10% compared to 2023, focusing on production capacity and European defense contractors.

Investors are concerned about the high valuations of European defense stocks, now trading at an average of 27 times their forward P/E. However, with the acceleration of defense spending and long-term aftermarket revenues from new platforms, the sector’s growth potential remains strong. European companies are expected to capture most of the additional defense spending.

Rheinmetall emerges as a top pick in European defense due to its strategic position as a key defense provider in Germany, benefiting from increased defense spending and munitions sales. The company has significantly improved its munitions production capacity and is in the running for a lucrative US contract worth around $40 billion to replace M2 Bradley vehicles.



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