European Defense Sector Outlook: Long-cycle rearmament drives fundamentals, but stretched valuations force selectivity

Europe is going through a defense awakening after years of underinvestment, and budgets are being set on the assumption of prolonged geopolitical tension rather than a quick return to the pre-2022 status quo. Even if some of today’s conflicts ease or peace talks progress, commitments to rebuild stockpiles, harden air and missile defense and meet higher NATO and EU spending targets point to a multi-year demand wave rather than a short spike. Capacity has lagged the step-up in demand, but order books and revenues have still grown strongly. Valuations look demanding for some names and more reasonable for others, and current prices embed very different assumptions about the length and profitability of the current cycle. 

The first part of this article sets out the European budget and industry context, as well as its implications for sector valuations. In the second part, we apply this framework to Nordic defense companies covered by Inderes plus a handful of peers, focusing on how current market conditions have reshaped fundamentals and how durable the tailwinds are for each business. With the market painting one picture and fundamentals another, stock picking in European defense has rarely mattered as much as it does today.

This article was done in collaboration geopolitics and defense expert Henri Vanhanen (X: @HenriVanhanen).

The public spending driving defense markets is inherently political, often favoring local providers

The current strong demand environment in defense is directly linked to politics. Higher threat levels drive higher budgets, and in Europe this interacts with fiscal rules, social spending priorities and industrial policy. Defense is also one of the few areas where governments are willing to act as patient, often relatively price-insensitive buyers when they see a strategic need, which makes the sector unusual compared to most industrial end markets.

Procurement rules and industrial policy pull in the same direction. National and EU frameworks favor European assets, design authority and joint programs. Security of supply, domestic systems and materials (content) and control over critical technologies shape how tenders are written and financed. Even when the competition is open, incumbents with a local presence and European systems and materials have an advantage that pure price comparisons miss.

Even with growing use of joint European procurement frameworks, most decisions still originate at national level and flow from domestic established big defense contractors (primes), that are awarded the main military contracts, down into supply chains. Governments are trying to balance three objectives at once: fix urgent capability gaps, improve readiness and stockpiles, and support domestic industrial capacity. This mix matters for equity investors because it affects who gets the orders, at what margins and over what time horizon.

Europe had its defense awakening and is planning budgets for long-term deterrence

After a decade of complacency, Russia’s full-scale invasion of Ukraine in 2022 marked a new strategic era for Europe. Budgets were raised, procurement accelerated and ammunition flowed east, but few initially recognized that this was the start of a structural rearmament cycle. The European realization came slowly. By 2023, it had become clear that the war would not end quickly and even when it does, the underlying Russian threat would persist. Europe is responding not only to a war on its doorstep, but also to the need to rebuild its security and industrial foundations in a world where peace can no longer be taken for granted.

Budgets tell the story. In 2024, EU member states spent ~343 BEUR on defense, equal to ~1.9% of EU GDP, roughly a 19% increase versus 2023. Projections for 2025 point to ~381 BEUR and ~2.1% of GDP, which would put spending roughly 60% higher than in 2020 and at record levels in absolute terms.

The NATO summit in The Hague has shifted the political frame from the old 2% guideline toward a broader 5% of GDP by 2035, with ~3.5% on core defense and up to ~1.5% on wider security and resilience. Few European countries will land exactly at 3.5% core defense in the near term, and some will use the flexible 1.5% band for spending that does not feed directly into listed defense companies. What matters for investors is the direction and duration. Europe is moving away from a world where many countries sat well below 2% toward a world where most are either at or moving toward the high 2% to low 3% range, with an explicit political narrative that higher defense and security spending is the new normal rather than a temporary spike. This creates a multi-year budget tailwind for the sector even if the war in Ukraine eventually de-escalates.

European defense industry lags the budget upturn, and capturing the spending in Europe is not straightforward

More money alone does not create capacity or capability. Europe still must turn higher defense budgets into industrial output, which is proving difficult. A European Commission paper, Readiness 2030, notes that the continent “cannot yet produce at the quantities and speed member states require.” After decades of peacetime defense budget downsizing, production capacity is stretched, so companies are wary of investing ahead of firm orders and tend to follow a “get the commitment, then invest” model to manage operational risk.

Since 2022, roughly three quarters of EU defense procurement (as in orders) has reportedly gone to non-European suppliers, with a large share directed to US primes for missiles, air defense systems and other high-end capabilities. This reflects both urgent operational needs and the fact that European supply does not yet cover all capability gaps on a large enough scale. It is also an industrial missed opportunity and a security supply vulnerability, which is why EU institutions are now explicitly trying to shift future procurement back toward European industry. Whether Europe can reconcile these aims under a common framework will determine whether integration becomes a strength or an additional layer of bureaucracy.

The new European defense financing architecture acts like a rail network that decides where extra billions are allowed to run. Instruments such as the European Defense Fund, ASAP, EDIP and SAFE are small next to national budgets, but they are powerful in steering where marginal euros go and in encouraging joint procurement and cross border cooperation. Eligibility rules and systems and materials requirements favor European assets, design authority and joint procurement. Suppliers that rely heavily on third-country designs or high non-European systems and materials face tougher eligibility tests and slower awards, while those that can build European consortia are better placed to access these flows. In practice, this tilts the field toward primes (e.g. Thales, Leonardo and Saab) and tier-one suppliers (e.g. Safran, Hensoldt and Diehl Defense) with broad geographic footprints, the ability to lead cross border consortia and deep local supply chains, while SMEs (e.g. MilDef, W5 Solutions, INVISIO and Bittium) embedded in these networks gain more durable workshare as projects move from R&D into serial production.

Orders are nevertheless flowing into the backlogs of primes and tier-one suppliers. As national budgets grow and the new EU instruments take effect, framework agreements and multi-year orders have built up record-high order books. Backlogs that once covered ~1–3 years of sales now often stretch toward the early 2030s across air, land and naval domains. These backlogs provide visibility and some protection from short-term volatility, but they are not the same as cash. Revenue recognition and cash conversion remain exposed to execution, export approvals, supply chain constraints and program delays.

As Europe rearms, markets are repricing defense from post-Cold-War discount to structural premium

Since the early post-Cold War peace dividend, listed defense companies have moved from discount toward a clear premium. CSIS shows US defense equities traded at a P/E discount to the S&P 500 in the 1990s and at parity or a slight premium in the 2000s. On a similar note, in Europe, budgets fell by over 30% in the first decade after the Cold War and the sector also carried a capital markets stigma, including ESG-driven exclusions prior to 2022.

In Europe, our index series spanning from 2004 to the present shows a long stretch where defense multiples were mostly range-bound. These multiples were generally in line with the STOXX Europe 600 and often below the STOXX 600 Industrials, which suggests that the sector was still treated as cyclical rather than a scarce asset that commands a premium. The 2020-21 period is noisy because P/E multiples were distorted by the pandemic earnings cycle, particularly in Industrials. The more durable change came after 2022, when European defense rerated to a sustained premium, with our selected bucket of European suppliers trading at an average of ~30x earnings, versus ~14x and ~21x for STOXX 600 and STOXX 600 Industrials, respectively, with cut-off date at December 15, 2025.

Historical P/E multiples for select European defense sector companies with short-, medium- and long-term averages, and historical P/E for two broader indicesSource: Bloomberg & Inderes

Even after Russia’s annexation of Crimea in 2014, the sector was still treated largely as cyclical. Russia’s full-scale invasion of Ukraine in 2022 changed that. European defense equities have rallied, outperforming broad equity markets as investors started to price in a longer and more intense rearmament cycle with more certainty. As a result, sector valuations moved from discount to premium. Large, listed primes and tier-one subsystem suppliers now often trade at higher multiples than general industrials, with multiples roughly double their own five-year averages. This has been largely based on optimistic expectations on expanding backlogs, improving backlog conversion, some protection from defense cost inflation and expanding operating margins.

European defense moves beyond earnings expectations, with momentum concentrated in a few names

Source: Bloomberg & Inderes

Under the surface, valuations look high for parts of the sector but not uniformly so. Some names trade on multiples that imply either a very long duration of elevated growth and margins or a very favorable mix of contracts and execution outcomes. Others still trade closer to broader industrial peers despite benefiting from the same structural tailwinds. The dispersion between individual names makes stock picking matter even more.

Three spending paths and what must be true

For today’s high multiples to make sense, we see three broad spending paths. These are scenarios that frame what must be true for current prices to hold or re-rate. We use these scenarios as the macro filter for the company level question that follows, which is who can convert backlog into durable cash and returns, and who is mainly riding the cycle.

Scenario 1: High and long, near the 3.5% core defense frame

In this world, the current political momentum hardens into a new peace time steady state near ~3.5% of GDP on core defense for a large group of European countries, and it stays there for a long period. Defense budgets grow faster than nominal GDP for an extended period, and the sector retains much of its current pricing power. Once capacity catches up, EU content rules become binding and pricing power normalizes at a level still above the pre-2022 decade, a higher structural valuation for the sector would be warranted. Long-duration cash flows support high earnings multiples, and leading primes and subsystem suppliers can plausibly grow into today’s valuations.

Scenario 2: War spike and then clampdown

Another path is a full-scale war that pushes defense spending temporarily well above 3.5% of GDP, into the high-single digits (or higher), in a scramble to plug capability gaps. Revenue growth and margins spike as capacity runs flat out. Later, political and fiscal constraints trigger a clampdown, including pressure on margins, higher expectations of “fair” returns for defense suppliers and even the risk of windfall taxes or de facto nationalization of some returns. This path can still generate strong medium-term cash flows, but it is less friendly to very high steady state multiples because investors have to discount a harsher policy reaction once the crisis phase passes.

Scenario 3: High 2s or low 3s

In a third path, European countries converge toward a high 2% to low 3% spending range on core defense, while using parts of the wider 5% frame for broader security and dual use spending such as infrastructure, cyber-capabilities and resilience. Spending is clearly higher than in the pre-2022 decade but does not fully reach or sustain 3.5% across the board. Defense companies still enjoy a multi-year tailwind, but the room for error on valuation is narrower, especially for the names that already embed aggressive growth and margin assumptions.

Our working base case sits closer to scenario 3. For most European countries, we assume core defense spending ends up in the high 2% to low 3% range of GDP over the coming decade, supported by NATO and EU commitments, while the full 3.5% acts more as a ceiling than a floor. Across all three scenarios, the common thread is that the key inputs to equity value in this sector, such as the length of the rearmament cycle, the profitability of new orders and the future policy stance toward defense industry returns are inherently uncertain. Investors paying the highest multiples today are effectively betting on a relatively optimistic combination of duration, growth and policy outcomes.

From bigger backlogs to durable equity value: Distinguishing between winners and passengers in the Nordic defense sector

At company level, the key question is not just who has benefitted from Europe’s defense awakening, but who can turn that environment into durable shareholder value. In the following snapshots, we focus on how each company's exposure, contracts, and capacity position to turn higher orders into cash flows. For each company, we distinguish between those whose current growth is driven mainly by consumables and urgent replenishment for Ukraine and those whose revenues are anchored in long-term strategic capability programs. The former are more vulnerable to a rapid easing of the conflict, while the latter are more tied to multi-year NATO and EU spending commitments than to the near-term tempo of the war. We also flag selected Nordic defense companies that have benefited from the same trends, while stopping short of valuation views since we currently do not have research coverage on them. The logic around risk is simple: smaller, faster growing companies can offer more upside than a larger name like Saab, but the path is more volatile and execution risk higher. In defense, the old saying holds that the faster you grow, the harder you can fall.

On the cash flow side, our general observation is that the defense sector’s profile in the post-2022 world is shifting toward steadier program cash flows. Longer horizon spending plans and more structured procurement are increasing the share of contracts that pull cash forward through milestone or performance-based payments and larger framework arrangements. In principle, that should support higher valuations because cash flow visibility improves, but the uplift remains uneven. Capacity ramp ups still absorb cash through higher working capital and capex requirements, and execution friction can be a real drag in any industrial scale up. Our view is that some names already discount an outlandish cashflow generation outcome, rather than the more realistic version where scaling is noisy, margins are contested, and the cash conversion path is worse than current valuations imply. In other words, the market is pricing a clean and certain landing in a world that rarely offers one, and our scenarios are a simple way to assess failure or success rates. Looking at the two sides of the coin: 1) the demand side question is whether the elevated regime survives political and fiscal cycles, and 2) the supply side question is whether industry can scale without eroding returns. If either disappoints, the cash flow profile will most likely not justify the confidence embedded in current valuations.

Inderes coverage

Saab (MCAP 284 BSEK) – Nordic full-spectrum prime turning European rearmament into multi-year growth

The company is Sweden’s flagship defense group, supplying military systems and services to government customers worldwide. Through the current rearmament cycle, Saab has scaled from 2022 revenue of 42 BSEK and an order backlog of ~128 BSEK to a rolling twelve-month revenue level of ~72 BSEK by Q3’25. At the time, the backlog was close to 200 BSEK, or roughly 3x annual revenue, and group EBIT margin stepping up from the mid-to-high single digits toward ~10%. Growth and profitability tailwinds have so far been concentrated in Dynamics, where near term momentum is heavily driven by Ukraine related demand for munitions and ground-based air defense rather than by long-term strategic programs across the group, which means that any durable progress in peace talks or a slowdown in replenishment could materially soften the division’s growth profile. Management used the early upturn to add Dynamics capacity and build up its AI, autonomy and electronic warfare assets, investing early to position the group for multi-year orders later.

Despite these tailwinds, which support significant short-term cash flow generation, we see Saab’s current valuation as discounting a growth, profitability and cash flow trajectory that is hard to reconcile with traditional valuation metrics. In our view, a meaningful part of today’s valuation reflects speculative positioning on a continuation of current Dynamics strength into the medium and long term and on future large contract wins that are not yet visible in firm orders. This effectively prices in a sequence of follow-on programs and export deals that may arrive later, arrive smaller or not arrive at all, which leaves the share price sensitive in the short term, uncertain in the medium term and difficult to sustain in the long term. At ~40x P/E on our 2026 estimates, we see Saab as overvalued versus what we regard as a fair valuation range of ~20-22x for a business with these fundamentals and risk profile. Read a more detailed account on how we fundamentally value Saab here.

Bittium (MCAP 1 BEUR) – Finnish secure communications specialist scaling with NATO-grade tactical networks

Bittium is a Finnish technology company specializing in secure communications and connectivity solutions for defense, public safety, critical infrastructure, and medical applications. In the current cycle, Bittium has moved from 2022 revenue of 82.5 MEUR, an operating result close to breakeven, and an order backlog of ~28 MEUR to 2024 revenue of 85.2 MEUR with a 45 MEUR backlog and 8.6 MEUR operating profit at a 10.1% margin. Bittium just won a breakthrough in Spain via collaboration with Indra and raised its 2025 guidance to indicate revenue of 116-120 MEUR and the operating result to be 19-21 MEUR. This includes a minor part of a technology transfer deal with Indra, but also the underlying earnings are on a great trajectory.

The war-driven step-up in European defense budgets has lifted Bittium’s Defense and Security business, with higher demand for tactical IP networks, software-defined radios, and secure authority smartphones for armed forces and security agencies, while its medical and R&D services activities remain more insulated from the conflict cycle. In our view, this mix matters. Part of today’s growth is conflict-driven, as NATO and EU countries accelerate near-term modernization of tactical networks and command and control systems, but much of the addressable demand is strategic, tied to multi-year programs to harden command, control, and communications rather than just the immediate tempo of the war. Together with cost cuts and a refocused strategy, this improves Bittium’s setup for growth and margin expansion as tactical networks modernize.

We see the current valuation as loaded with aggressive expectations, even after closing the Indra deal. With 2025 guidance, Bittium’s Defense and Security segment EV/EBIT is roughly 45-50x (estimated based on the group’s current valuation), so the company would need to deliver outsized near-term wins in defense to make the multiple look comfortable. As Bittium currently seems to have a solid technological edge against major competitors with extremely capable Tactical IP Networks and Tough SDR radios compatible with ESSOR wavelengths, it could gain a significant amount of market share during the coming years and deliver the required results. The Indra deal in Spain proves that Bittium does have what it takes to win also over the “national champions,” so the outlook is excellent. Whether it’s enough to justify a market capitalization of 1 BEUR remains to be seen.

Outside of Inderes coverage

W5 Solutions (MCAP ~900 MSEK) – Leveraging the current demand dynamics through training, integration and power

W5 Solutions is a Swedish defense technology group that delivers live fire and simulation training systems, mobile shelters and systems integration, and rugged power supplies, batteries and chargers to defense agencies and prime contractors in the Nordics and wider Europe. W5 has more than doubled revenue since 2022 and materially expanded its order backlog, while profitability is normalizing after a volatile scale-up phase.

The war in Ukraine and Europe’s shift toward higher defense readiness have been important catalysts, as Nordic and European armed forces increase live fire training volumes, buy more deployable shelters that can host command and communications equipment and upgrade rugged power solutions for deployed units. We see two layers in this demand: an immediate conflict driven layer, with higher training tempo and faster fielding of power and infrastructure projects linked to the war, and a structural layer tied to multi-year plans to replace aging training infrastructure, expand simulation capacity and modernize mobile power and integration systems that will be needed regardless of how the Ukraine conflict evolves. W5’s growth also reflects an aggressive acquisition agenda in niches such as battery charging, shelters and target systems, leaving operational upside as it digests acquisitions like ArcQor, MR Targets, Omnifinity, Kongsberg Target Systems and Box Modul and delivers a thicker, longer dated order book.

MilDef (MCAP 5.5 BSEK) – Turning defense digitalization into rugged tactical IT

MilDef is a Swedish defense technology group that supplies mission critical computers, displays, networking and integration solutions to defense forces, government agencies and critical infrastructure customers in the Nordics, wider Europe, the US and other NATO markets. MilDef has more than doubled revenue since 2022 and nearly tripled backlog, while margins have stepped up into the low teens.

The war in Ukraine and higher NATO and European defense spending have accelerated demand for digitalized, secure tactical IT on vehicles, ships and in deployed units, as armies bring forward projects to modernize armored vehicles, artillery systems and command posts under long-running framework agreements. Beneath that, there are two distinct layers of demand: one linked to the war in Ukraine, with faster decisions and earlier fielding of rugged computers, displays, switches and servers into existing and new platforms, and one structural, tied to multi-year programs to digitize land and naval forces, upgrade command, control and communications and standardize on common vehicle architectures that continue regardless of how the Ukraine war evolves. MilDef has positioned itself for both layers through targeted M&A, including the 2022 acquisition of Handheld and the 2025 acquisition of German rugged computer specialist Roda, and by tripling production capacity with new facilities in Sweden and Wales and rolling out its “Made in X” local footprint model, which together leave meaningful operational upside as the record order book is delivered.

Scandinavian Astor Group (MCAP 1.3 BSEK) – Small Swedish defense platform scaling through the cycle

Scandinavian Astor Group is a Swedish defense group that, through Astor Tech, Astor Industry and Astor Protect, combines electronic warfare and test systems with high performance composites, precision components and protection and survival solutions for defense, industrial and public safety customers. At group level, it has used the current rearmament cycle to scale from a small base into a more substantial platform, with sales roughly ~6x higher than in 2022, an order book that is nearly 5x larger and operating profitability shifting from loss making into roughly 15% adjusted EBITDA.

The war in Ukraine has been a powerful external tailwind for its niches and Astor has captured that demand, but the significant performance also reflects an aggressive M&A agenda and meaningful operational upside embedded in the latest additions, such as ammunition producer Ammunity acquired earlier this year. In simple terms, the group now spans both consumables that are used up in training and operations, such as small-caliber ammunition and certain protection products, and more strategic capabilities such as electronic warfare and test systems and high-performance composites that are built into long-life defense platforms. The consumables side is more exposed to the current conflict and training tempo, while the strategic systems and components are more likely to be driven by long term replacement and upgrade cycles in Sweden and wider Europe, even if the Ukraine conflict gradually eases.

INVISIO (MCAP 12.5 BSEK) – Niche soldier communication supplier benefitting from a long upgrade cycle

INVISIO is a Swedish communications group that supplies tactical communication and hearing protection systems for soldiers and other professionals in noisy, mission critical environments, through modular personal systems and vehicle intercoms. Long before Russia’s full scale invasion of Ukraine it had already turned this narrow niche into a profitable growth business, with revenue rising from ~0.5 BSEK in 2018 to ~0.8 BSEK in 2021, double digit operating margins and a record order book of ~0.2 BSEK as US, UK and European customers gradually upgraded radios, headsets and intercoms, although covid and procurement delays made 2020-21 a slower patch.

Since 2022, the combination of a deteriorating security environment and higher defense budgets has steepened that trajectory, with sales reaching ~1.2 BSEK in 2023 and ~1.8 BSEK in 2024, order intake close to 2 BSEK and an order book above 0.8 BSEK, operating margins in the low twenties and a five-year revenue CAGR of ~29%, supported by earlier R&D, the Racal Acoustics acquisition and the recent UltraLYNX intercom line that deepen its position in modern soldier and vehicle systems. At product level, INVISIO sells both “consumables” in the form of headsets and personal systems that are replaced and expanded as units train and deploy, and more strategic communication capabilities as armies standardize on new radio and intercom architectures. This mix means that part of the recent growth is clearly tied to the current conflict environment and elevated training tempo, but a large share of demand is structural, linked to multi-year fleet upgrades and hearing protection and communication standards that are likely to persist even if the war in Ukraine gradually eases.

Argo Defence Group (MCAP 330 MSEK) – A small FMV-centric platform with multi-year framework visibility

Argo Defence Group is a Swedish defense group that works through specialist subsidiaries to deliver defense materiel, counter explosive risk solutions and airfield infrastructure. Its main customers are defense authorities, civil contingencies agencies and selected international organizations and infrastructure clients, with a core focus on Sweden, Ukraine and the wider Nordic region. At group level it has used the current Nordic and European rearmament cycle and Ukraine focused demand to scale from pro forma 2023 revenue of ~31 MSEK and negative EBITDA of ~5 MSEK to 2024 revenue of ~141 MSEK with EBITDA of ~15 MSEK at a ~12% margin. It guides for 2025 revenue of 150-165 MSEK and EBITDA of 18-23 MSEK at an 11-15% margin. This is underpinned by a contract portfolio of ~862 MSEK with ~706 MSEK remaining, including a 340 MSEK FMV container framework and a 200 MSEK framework for advanced medical equipment, such as reinforced ICU pumps and cold storage, that together provide multi-year revenue visibility across Argo’s demining, medical, power and infrastructure niches. 

The war in Ukraine, Sweden’s step up in defense spending from 1.4% of GDP in 2023 to a planned 2.6% by 2028, and increased investment in civil preparedness and critical infrastructure provide the macro tailwinds. The step change in scale also reflects a long running strategic shift from broad government assignments into defense and civil contingency procurement, built around a high hit rate tender engine for FMV and similar authorities with a historical 51% hit rate by count. In parallel, Argo is broadening its platform through acquisitions such as Zel Aaren and LPG Trafikmarkeringar, adding more proprietary products and airfield capabilities that can be pushed through its framework and supplier network. The group targets organic revenue growth above 20% per year and EBITDA margins above 15% over the medium term as it deepens its position in defense materiel, counter explosive risk and airfield infrastructure in Sweden, Ukraine and selected export markets.