Bernstein Touts Leonardo, Thales, and Rheinmetall on Company-Specific Catalysts

Analysts at Bernstein are advising investors to focus on specific European defense stocks with strong individual catalysts, highlighting Leonardo, Thales, and Rheinmetall as its top picks over a broad sector-wide approach.

A Shift to Stock-Specific Drivers

In a research note, the brokerage argued that the investment case in the European defense sector is shifting. While geopolitical tensions have broadly lifted the industry, Bernstein believes company-specific factors like earnings upgrades, operational improvements, and distinct growth projects now offer a more compelling route to returns.

This selective approach comes as the environment for the sector becomes more challenging, according to the note. This makes individual company execution a key differentiator for investors looking for value in the space.

Top Picks and Catalysts

Bernstein outlined a distinct thesis for each of its preferred names, moving beyond general industry tailwinds.

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• Leonardo: The Italian firm is identified as a key "self-help" story with potential for a valuation rerating. Analysts expect another "beat-and-raise" quarter and are 5% above consensus on EBITA forecasts. The firm noted that Leonardo's shares trade at a discount to the sector, at approximately 11 times EBITDA versus the sector average of 14 times, and views the recent selloff following a CEO change as a buying opportunity.
• Thales: The French company is also favored for its self-help potential, with a solid second-quarter performance anticipated from its core aerospace and defense divisions. Bernstein is 6% above consensus for these units. While below consensus on the smaller cyber division, analysts believe the unit is poised for a return to growth and is no longer large enough to significantly weigh on group earnings.
• Rheinmetall: The German contractor remains Bernstein's preferred growth name, citing an "unmatched growth profile." The upcoming second-quarter results are seen as a key near-term catalyst, where the company is expected to meet an implied 60% revenue growth target. An anticipated major order for its Arminius Boxer vehicle provides another potential boost, according to the note.

Analyst Outlook

While bullish on Rheinmetall's near-term growth, Bernstein remains more cautious on its longer-term outlook, with its 2030 EBIT forecast sitting 18% below consensus. However, the firm stated that the current risk-reward profile is attractive given its near-term growth prospects.

The overall analysis suggests that the initial tailwind from increased defense budgets across Europe may be maturing. The focus is now shifting from a "rising tide lifts all boats" scenario to a more nuanced environment where investors must scrutinize individual company fundamentals and execution to identify value.