But analyst Loredana Muharremi says the market reaction is “overstated”. “European defence valuations are anchored in structural budget increases rather than short-term Ukraine revenue, and rearmament plans are unlikely to reverse even in the event of a peace agreement,” writes Muharremi in a Nov 24 note.
Under the terms of the deal, Ukraine would reportedly cede remaining eastern Donbas territory, halve its armed forces, abandon key weapon classes, not host foreign troops and lose access to Western long-range systems that reach deep into Russia.
With US support already rolled back and Europe focused on national capabilities, Ukraine faces pressure to find a deal, but the current terms have been previously rejected. “Such concessions would erode its security and could prompt Europe to accelerate defence spending in response to a stronger Russian position,” according to Muharremi.
Stocks ‘undervalued’ after correction
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London-listed BAE Systems, the largest defence contractor in Europe, has seen its shares decline 6.5% over the past five days, though its shares are still up 44% year to date. Morningstar has a four-star rating on BAE Systems against its five-tier scale, with a fair value estimate of GBP2,250.
New York Stock Exchange-listed Boeing saw its shares slip 5.8% over the past five days, though it is up 4.2% year to date. Similarly, Morningstar has a four-star rating on Boeing with a target price of US$246.
NYSE peer General Dynamics slipped 1.6% over the past week but its shares are up 30% year to date; while Lockheed Martin is down 4.7% over the past week and down 6.5% year to date. Morningstar has three- and four-star ratings on General Dynamics and Lockheed Martin respectively, with fair value estimates of US$342 and US$538.
Muharremi sees European defence stocks as undervalued after the recent correction. “The sell-off reflects short-term headlines, not fundamentals. We maintain our fair value estimates across the sector, with Rheinmetall as our top pick and current levels a compelling entry point.”
Shares in the German automotive and arms giant, traded in Frankfurt, have slid some 15% over the past five days but are up some 138% year to date to EUR1,443 as at Nov 25.
Muharremi has a four-star rating on Rheinmetall with a fair value estimate of EUR2,220.
“Ukraine procurement is marginal for most contractors. Germany is now the largest single supporter of Ukraine. Yet, Rheinmetall has only EUR1.7 billion of Ukraine orders within an EUR64 billion backlog, underscoring the sector’s long-run domestic and NATO-driven demand,” notes the analyst.
According to Muharremi, European governments’ long-term demand reflects inventory rebuilding, capability and platform scale-up and autonomy from US support, with US pressure to reach 3.5% of GDP on defence spending. “These fundamentals remain intact and support order visibility, backlog conversion and cash generation.”
