Bernstein named Leonardo, Thales and Rheinmetall as its preferred plays on the European defense complex, saying stock-specific catalysts are a more attractive route to returns than general sector ownership.
The broker described Leonardo and Thales as "self-help" situations where better execution and a positive earnings trajectory could lift sentiment and justify multiple expansion. Rheinmetall was flagged as Bernstein's favored growth franchise, supported by immediate catalysts and what the broker calls an "unmatched growth profile."
On Leonardo, Bernstein expects another "beat-and-raise" quarter and positions its model about 5% above consensus for EBITA. The firm also anticipates an improvement in free cash flow and sees room for economists and analysts to raise 2026 guidance across most metrics if the company delivers as expected.
Bernstein argues Leonardo is a notable self-help story in what it views as a tougher backdrop for many European defense names. The broker highlights valuation slack as part of the attraction: shares are trading at around 11 times EBITDA, below the sector average of roughly 14 times. The recent downward move following a surprise CEO change is interpreted as an opportunity to buy, on the basis that the company's strategic direction is expected to remain intact.
For Thales, Bernstein expects a solid second-quarter performance, driven by momentum in its core aerospace and defense segments. The broker sits about 6% above consensus for the aerospace and defense division, while its forecast for the Cyber & Digital unit is roughly 6% below consensus.
Bernstein recently moved to a tactical upgrade on Thales and expects the cyber business to return to growth. Given that cyber represents only about 8% of Thales's sales and that comparisons should be easier in the near term, the broker believes the unit is no longer large enough to drive major earnings downgrades for the group.
Rheinmetall is the broker's preferred vehicle for growth exposure. Bernstein sees the upcoming second-quarter results as the primary near-term trigger and expects the company to achieve its implied 60% revenue growth target. Meeting that target, the broker says, could help the shares recover some of their recent losses. Additionally, an expected Arminius Boxer order is cited as a further catalyst.
At the same time, Bernstein notes caution on longer-term assumptions and models an outcome that is 18% below consensus on 2030 EBIT. Despite that conservatism, the broker contends that the current risk-reward is appealing given the company's growth profile.
Summary
Bernstein prefers three European defense stocks where company-specific improvements and near-term orders can drive earnings upgrades and valuation rerating: Leonardo for expected beats and cash-flow improvement; Thales for aerospace momentum and a recovering cyber division; and Rheinmetall for pronounced near-term growth catalysts.
Key points
- Bernstein models Leonardo about 5% above consensus on EBITA and highlights potential upgrades to 2026 guidance across most metrics - impacts equity valuations in the defense sector.
- Thales is expected to print a solid quarter, with aerospace and defense momentum offsetting near-term cyber weakness; cyber accounts for roughly 8% of sales.
- Rheinmetall is the broker's preferred growth name, with the second-quarter print and an anticipated Arminius Boxer order presented as immediate catalysts; the broker is cautiously lower than consensus on 2030 EBIT by about 18%.
Risks and uncertainties
- The recent CEO change at Leonardo prompted a share selloff; while Bernstein views this as a buying opportunity, execution risks remain relevant for valuation recovery - this affects investor sentiment in industrial and defense equities.
- Thales's Cyber & Digital division is modeled below consensus and, if it fails to return to growth as anticipated, could limit overall earnings upside - impacting technology-related defense segments.
- For Rheinmetall, Bernstein is cautious on long-term forecasts and sits materially below consensus for 2030 EBIT, indicating uncertainty around sustaining its projected growth profile and the durability of revenue acceleration.
Overall, Bernstein prefers targeted exposure to the names it believes have clearer paths to earnings upgrades and catalysts, rather than broad sector ownership.