Jefferies has upgraded Leonardo to a Buy rating and installed the firm as its new top pick in the European aerospace and defense sector, moving Rheinmetall down the list as the brokerage rebalances its sector preference toward defense electronics and air defense over land-based systems.
The upgrade follows a methodological revision across Jefferies' defense coverage. The bank said it is shifting most companies onto a 2028 sum-of-the-parts (SOTP) valuation timetable, a change the firm described as reflecting that "near-term execution remains key." Within that revised framework, Hensoldt was retained on an accelerated timeline because of its growth characteristics.
Jefferies' altered horizon tends to favor businesses linked to defense electronics, elevating both Thales and Leonardo in the firm's order of preference. At the same time, the bank reduced price targets for CSG and RENK, a move it said was made despite largely unchanged full-year estimates.
Leonardo's shares have tracked the wider defense sector's de-rating, but Jefferies notes the company remains the least expensive air defense option in the bank's coverage, trading at 14 times 12-month forward EV/EBIT. Analysts on the Jefferies team, including Chloe Lemarie, emphasized Leonardo's exposure to MBDA, calling MBDA "a major driver in our view for upside on the 2029 outlook." MBDA is identified as a European missile systems manufacturer jointly owned by Airbus, BAE Systems, and Leonardo.
Jefferies' analysts also pointed to potential export prospects for Leonardo-linked programs such as the SAMP/T NG and the Eurofighter. The brokerage cited the removal of uncertainty around GCAP funding following the Defense Industrial Partnership as another constructive development for the company.
On the numbers, Jefferies said its 2028 EBIT estimate for Leonardo sits 8% above consensus, a divergence the bank attributes to an expectation of stronger performance from Leonardo's Defense Electronics & Advanced Technologies (DE&E) division. Using its updated SOTP approach, Jefferies sees roughly 30% upside to its price target for the firm.
The firm also revised near-term assumptions for Leonardo's 2026 outlook. Jefferies raised its 2026 estimates to include a nine-month contribution from Iveco Defence Vehicles, incorporating approximately €1.1 billion of sales and about €120 million of EBITA for the year, in line with company guidance. The bank lifted its expectations for margin recovery in Aerostructures and modestly increased growth assumptions for DE&E on the back of demand for air defense systems.
Jefferies noted that DRS, which is majority-owned by Leonardo - more than 70% held and consolidated within DE&E - is trading at a premium. DRS is quoted at 22 times 2028 EV/EBIT, compared with the 17 times multiple Jefferies applies to the division in its SOTP model. The analysts suggested that the premium on DRS could generate further multiple tailwinds for Leonardo.
"All in all, we expect Leonardo to re-rate, to multiples closer to BAE Systems as the basis of our SOTP," the bank concluded in its coverage note.
Elsewhere in Jefferies' European coverage, CSG remained listed among the bank's top picks heading into second-quarter results even though the firm trimmed its price target, pointing to the company's "highly de-rated profile." In civil aerospace, Jefferies selected Rolls-Royce as its top pick, citing anticipated guidance upgrades on Power Systems and improvements to aftermarket margins.
Context for investors
- Valuation shift: Moving to a 2028 SOTP horizon re-ranks companies and emphasizes longer-term earnings potential for defense electronics and air defense.
- Company outlook: Jefferies' 2028 EBIT for Leonardo is above consensus, driven by expected DE&E strength and contributions from Iveco Defence Vehicles.
- Market multiples: DRS's premium valuation relative to the DE&E multiple used in the SOTP could support upward multiple re-rating for Leonardo.