European officials talked of increasing spending on defense at the Munich Security Conference over the weekend, which could prove to be a meaningful tailwind for the regional defense stocks.
“We estimate potential sector upside of 30%, at 3% of GDP (lower than the implied 50% increase due to time value of money),” analysts at Citi said.
In particular, the investment firm is bullish on German defense tech firm Hensoldt and Swedish defense manufacturer Saab. Here’s what these two European defense stocks have in store for investors in 2025.
Hensoldt AG (ETR: HAG)
Hensoldt rallied about 12% following the Munich Security Conference. Year-to-date, the European defense stock is now up more than 30%.
Still, Citi expects further upside in Hensoldt stock in the wake of a potential increase in regional defense spending.
That’s because the German multinational will likely win more government contracts and military projects as European nations execute their plans of higher spending on defense.
This will result in increased revenue for Hensoldt. Citi is bullish on the company’s acquisition of ESG for more than $700 million.
In the latest earnings release, Oliver Dorre – the chief executive of Hensoldt told investors:
After just 200 days, we have largely completed post-merger integration of ESG. We consistently expand Hensoldt’s position as a reliable partner to our customers, both nationally and internationally.
Note that Citi isn’t alone in keeping bullish on Hensoldt stock. Street’s consensus rating on the German firm also sits at “overweight”.
A 0.85% dividend yield makes Hensoldt shares all the more exciting to own for those interested in setting up an additional source of passive income.
Saab AB (STO: SAAB-B)
Another European defense stock that Citi analysts are convinced will benefit from increased regional spending on defense is Saab.
The aerospace and defense company is a particularly exciting pick considering “Sweden is growing defense spending at a much higher rate (and from a lower base) than a country like the UK.”
That’s meaningful for Saab as it drives about 40% of its sales from Sweden.
Citi is bullish on Saab stock also because it recently reported strong results for its fiscal fourth quarter. Micael Johansson – the company’s chief executive told investors at the time:
In the wake of global geopolitical uncertainty, Saab is committed to being a reliable partner, supporting countries in building their defense capabilities and contributing to increased European defense capacity.
Saab now expects positive operational cash flow on 12% to 16% organic sales growth in 2025. Much like Hensoldt, Saab stock is worth owning also because it pays a dividend yield of 0.63%.
Street’s consensus rating on Saab shares currently sits at “overweight”, suggesting other firms are convinced of its future potential as well.
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