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Regards,
Ross Givens
Director of Research, Traders Agency

3 European Defense Stocks Raising Guidance While the Sector Lags

Authored by Dan Schmidt. Article Published: 9/14/2026.

European defense stocks were a banner trade in 2025, and that trend was expected to continue into 2026. But markets laugh at grand plans, and the industry has lagged despite growing backlogs. The Stoxx Europe Aerospace and Defense Index was down more than 1% year to date (YTD), despite a nearly 5% advance in the broader Stoxx 600 index.

An alarming earnings report from German giant Rheinmetall AG (OTCMKTS: RNMBY) added fuel to the sell-off, but it is not a verdict on demand. Some European defense contractors have been unfairly dragged down in the process.

Rheinmetall: Q1 Miss Resets Valuations

The European defense trade was expected to continue benefiting as EU nations increased their budgets. Germany removed the debt brake that limits defense spending, and backlogs have grown to record levels at firms across the bloc. German-based Rheinmetall was one of 2025’s biggest defense trade winners, but its Q1 2026 earnings report and subsequent news created concerns about the durability of its revenue growth.

Rheinmetall released its fiscal Q1 2026 results on May 7 and reported revenue growth of 7.7% year over year (YOY), but missed consensus analyst expectations by more than 15%. Operating margin was in line with expectations, but operating free cash flow was negative €285 million. Management also reaffirmed its full-year 2026 revenue guidance rather than raising it, despite 31% backlog growth. A month later, Germany canceled its order for six F126 frigates.

The F126 cancellation raised just as many eyebrows as the Q1 revenue miss. A backlog only matters if orders actually convert, and a €300 million (approximately $350 million U.S.) order cancellation is a serious hit to future revenue. Investors looking at this sector need to screen for both order and revenue growth while paying close attention to book-to-bill ratios and backlog coverage. Here are three companies in a stronger position than Rheinmetall.

Leonardo: Flat Revenue Guidance Is Not a Sign of Wavering Demand

Leonardo S.p.A. (OTCMKTS: FINMY) is an Italy-based aerospace and defense firm that serves clients worldwide and even has a subsidiary trading on U.S. exchanges, Leonardo DRS Inc. (NASDAQ: DRS).

In its H1 2026 report on July 30, Leonardo reaffirmed its full-year 2026 revenue guidance at €22.1 billion (approximately $25.6 billion), despite new orders rising from €26.2 billion (approximately $30.4 billion) to €28.2 billion (approximately $32.7 billion). EBITA and free operating cash flow guidance were also raised, while net debt was guided down from €2.3 billion (approximately $2.7 billion) to €2.2 billion (approximately $2.6 billion).

This is the exact opposite of the scenario investors are seeing with Rheinmetall. Orders are still growing, operating cash flow has increased, and book-to-bill has grown to 1.6. Leonardo is choosing high-value orders, and its operational constraints are capacity-based rather than demand-based. Analysts seem to agree with this assessment, as Jefferies and DZ Bank both upgraded the stock to Buy from Hold and Strong Buy from Buy in July.

Thales: Guiding Toward Full Cash Conversion

If backlog conversion is a key concern, Thales S.A. (OTCMKTS: THLLY) is the slow-and-steady winner of the race.

The France-based aerospace and defense firm does not have the revenue growth metrics of Leonardo or Saab, and it projects only 6%-7% organic growth in fiscal 2026.

However, its defense order intake is up 22% YOY on an organic basis, and operating cash flow has soared. Perhaps most importantly, the company raised its guidance for conversion to free operating cash flow to 100% to 110%.

The total order book was worth €52 billion (approximately $60 billion) as of June 30, and the Royal Bank of Canada initiated coverage of the stock with a Moderate Buy rating on Aug. 11.

Saab: Flat Guidance Hides 60% Cash Conversion, and Sales Target Beats

Saab AB (OTCMKTS: SAABY) did not increase any of its guidance projections in 2026, instead choosing to play it safe while ensuring that supply chain disruptions are resolved by the end of the year. But the conservative guidance belies the company’s performance: It is beating its own estimates, and revisions could come later this year.

New bookings grew 141% YOY in fiscal Q2 2026, including a SEK 47 billion (approximately $4.8 billion) submarine order from Poland. The H1 2026 backlog grew 61% from the same period last year, while sales grew 25% versus the company’s 22% target. Organic sales growth has nearly surpassed 30%.

Analysts have upgraded Saab shares throughout the year, suggesting this re-rating is not complete. The two most recent upgrades came from Royal Bank of Canada and Barclays, which upgraded the stock to Hold and Strong Buy, respectively.

This was the second Strong Buy rating the stock received this year, after Pareto Securities upgraded the company on June 25.