Al Root

President Donald Trump's stances on government waste, NATO, and Ukraine haven't helped U.S. defense stocks lately. Things have been better for European makers of defense equipment.

Over the past few days, Trump has said Elon Musk's Department of Government Efficiency -- charged with rooting out government waste and fraud -- was heading to the Pentagon and that defense budgets could be halved if negotiations with China and Russia yield a more stable geopolitical backdrop. Defense Secretary Pete Hegseth said it was unrealistic to expect Ukraine to maintain its prewar boundaries with Russia, while Vice President J.D. Vance criticized the North Atlantic Treaty Organization.

Shares of U.S. defense companies have been hit hard. Coming into Tuesday trading, Lockheed Martin stock was down about 22% since the Nov. 5 election. Share of Lockheed, Northrop Grumman, General Dynamics, and L3Harris Technologies were off an average of 19%.

European investors, however, may have gotten a different message.

"NATO is dead," wrote Vertical Research Partners analyst Rob Stallard in a Tuesday report summarizing recent news for his clients. No one really expects the U.S. to abandon NATO, but Polish and U.K. officials expressed the need for Europe to build its own capacity to defend itself.

That might mean more spending for European-based defense firms. Shares of U.K.-based BAE Systems, France-based Thales, Italy-based Leonardo, and Sweden-based Saab were up about 25% on average since the election.

All four shares were up again this week, by about 2% on average, following the recent comments from U.S. officials.

The gains have left the EU defense firms trading at about 21 times the per-share earnings expected for 2025, while their U.S. counterparts trade for about 16 times.

The valuations reflect both investor sentiment and the companies' size. The U.S. defense companies are far larger, generating an estimated $190 billion in aggregate 2025 sales. The EU firms are expected to generate less than half that amount.

Revenues, to some extent, line up with military spending. The U.S. spends roughly $1 trillion on national defense annually. Europe spends closer to $300 million.

Of the four European defense stocks, Leonardo has the highest Buy-rating ratio: Almost 80% of the analysts who cover the company rate the shares at Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 55%.

Recent gains have left Leonardo shares trading above the average analyst price target of about EUR33 ($34.50). Shares were at almost EUR35 in Tuesday trading.

In the U.S., L3Harris is the most popular defense stock on Wall Street, with about 72% of analysts who cover the company rating the shares at Buy. The average analyst price target is about $260 a share, while the stock was just under $200 in early Tuesday trading.

Ratings from Wall Street analysts are only one way to look for ideas. What's more, they tend to lag behind all of the recent developments. Investors have no choice but to brace for more volatility as the situation on multiple fronts -- including DOGE and Ukraine -- develops.

The four large U.S. defense stocks rose by about 0.6% on average early Tuesday, following a tough week. All four stocks are down over the past five days.

The S&P 500 and Dow Jones Industrial Average were down about 0.1% and 0.3%, respectively.

Write to Al Root at allen.root@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 18, 2025 11:13 ET (16:13 GMT)

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