J.P. Morgan lifts targets on European defense stocks amid spending push

Investing.com -- J.P. Morgan has raised its price targets for five European defense companies, citing improved financial performance forecasts and increased government commitment to military spending, in a note dated Monday. 

The revisions cover two German firms, Hensoldt and Renk Group AG, and three UK companies, BAE Systems (LON:BAES), Babcock and Qinetiq (LON:QQ).

In Germany, J.P. Morgan analysts now value Hensoldt and Renk using the same framework applied to Rheinmetall (ETR:RHMG). 

This includes a 2030 estimated price-to-earnings multiple of approximately 23x and a free cash flow (FCF) yield of about 4%. 

Hensoldt’s price target was raised to €110 from €50, reflecting a 20% upside from its current level. 

Renk’s target increased 25% to €87.5. Rheinmetall’s remains at €2,100, implying 11% upside.

The changes are backed by strong sales and margin forecasts. Hensoldt’s organic sales are projected to grow at a 16% compound annual rate through 2030, with EBITA margins rising from 13.2% in 2024 to 15.3% in 2030. 

Renk’s margin is expected to expand from 16.6% in 2024 to 21.3% in 2030. Rheinmetall is forecast to reach a margin of 18.8% by 2030. 

The average clean EBITA margin for the three German firms is projected to grow by 4.1 percentage points over the period, with FCF reaching 84% to 95% of net income.

J.P. Morgan cited Germany’s capacity for increased defense spending due to lower debt and underinvestment between 1990 and 2020. 

The brokerage expects the country to remain in a prolonged rearmament cycle, likely extending through 2035.

In the U.K., the upward revisions follow reports that the Labour government plans to release a Strategic Defence Review committing to raise defense spending to 3% of GDP by 2034, up from 2.3%. 

Though the political outlook beyond 2029 is uncertain, J.P. Morgan analysts noted cross-party support for increased defense investment.

BAE Systems’ target was raised to 2,100p, implying a 10% upside. Babcock’s was lifted by 37% to 1,280p, and Qinetiq’s rose 33% to 660p. 

The U.K. companies are valued at lower multiples than their German peers, with J.P. Morgan applying 2030E P/E ratios of 13.5x to 16.5x and average FCF yields of 5.4%.

Forecasts for U.K. firms show slower growth. BAE Systems is projected to grow sales at a 7% CAGR through 2030, Babcock at 5%, and Qinetiq at 6%. 

Clean EBITA margins for the UK group are expected to rise by an average of 1 percentage point by 2030. FCF is projected to average 79% to 82% of net income.

Across the sector, J.P. Morgan said the revaluation reflects long-term earnings visibility and strong cash flow expectations tied to increasing global defense budgets.