Concerns about the United States potentially easing its commitment to NATO have led to a significant rise in defense stocks in the UK and Europe. However, an analysis by Morningstar indicates that only a select few companies remain competitively valued.
German defense firm Rheinmetall RHM has achieved a five-star rating following an upward revision of its fair value estimate by Morningstar. This positions it as the most attractively valued company in this analysis, with its new fair value estimate exceeding the forecasts of 16 analysts monitored by Morningstar.
In the UK, Rolls-Royce RR. and France’s Thales HO maintain their four-star ratings, having seen stock returns of 25.88% and 38.34% respectively over the past month, indicating continued strong value.
Additionally, UK-based BAE Systems BA., Italy’s Leonardo LDO, and Sweden’s SAAB SAAB B are rated as three-star stocks, indicating that they are considered fairly valued.
There remains a high degree of uncertainty surrounding the market, with unclear order books and revenue projections creating potential adjustments to fair value estimates as analysts keep a close watch on each stock’s future potential.
Morningstar equity analyst Loredana Muharremi remarks, “We’re facing considerable uncertainty right now. While there is an effort to assess the impact on defense companies, the magnitude of the increase in defense spending is not yet fully understood, including how it will be allocated and its timing in converting to actual orders. As more details unfold, further upward adjustments to estimates may occur.”
The Success of Rheinmetall Stock
Germany’s Rheinmetall has emerged as a notable success in the European aerospace and defense market. Known for its production of combat equipment and armored vehicles, its stock price has surged 194.38% over the past year, largely due to shifting perceptions regarding defense in Europe. Following a statement by incoming German Chancellor Friedrich Merz about pursuing “independence” from US contributions to NATO, the stock has continued to climb.
Why Rolls-Royce Stock is Thriving
Rolls-Royce, known primarily for its jet engines utilized by manufacturers like Airbus AIR and Boeing BA, has also seen notable growth. In 2023, defense projects generated less than a third of its revenue, but the company’s defense order book reached a record £9.2 billion by the end of 2024, bolstered by the AUKUS submarine defense pact and an agreement to supply F130 engines for the US Air Force’s aging B-52 fleet. Under CEO Tufan Erginbilic’s management, Rolls-Royce has become a financially robust player in the aerospace and defense sectors.
