Defense stocks have been on a significant rally this year, especially those in Europe. This is because investors expect a massive increase in defense spending over the coming years. President Donald Trump aggressively courted NATO allies to boost their defense budgets to 2% of GDP in his first term.
Now, he’s doing the same, but this time wit the target of 5% of GDP.
All NATO countries except Spain have agreed to raise their defense spending to 5% of GDP by 2035. BTIG believes that this could double the export opportunity for U.S. contractors. Two-thirds of European military equipment imports are already American. U.S. defense stocks could soon follow in the footsteps of European ones and surge.
Defense Stock #1: Lockheed Martin (LMT)
Lockheed Martin (LMT) was dealt a significant blow earlier this year when it lost the Next Generation Air Dominance (NGAD) contract to Boeing (BA), but that doesn’t mean it’s out of the fight. Lockheed is a dominant name in defense contracting, supplying everything from fighter jets to supporting the Patriot missile system. It has a backlog of $173 billion.
Fresh demand from European countries could send demand soaring even more. Lockheed Martin’s F-35s should be one of the first products to benefit as NATO members look to upgrade their air forces. For instance, Denmark is apparently considering purchasing more F-35s than it initially planned.
Revenue increased 4% in Q1, and earnings per share of $7.38 beat estimates of $6.35 by a nearly 15% margin.
Based on the ratings of 23 analysts, the mean price target here is $524.41, implying around 10.5% upside potential. If European allies make good on their commitments, it is likely that LMT will see a significant bump in growth. Price target hikes should follow suit.
Defense Stock #2: Northrop Grumman (NOC)
Outside of the U.S., Europe accounts for more than half of Northrop Grumman’s (NOC) international revenue, and that total could soar significantly as NATO countries pledge to ramp up defense spending.
Overall, the company did report a nearly 7% decline in revenue in the first quarter. Earnings per share of $3.32 were down 47% from the year-ago period. Northrop Grumman attributed these results to the planned wind down of some of its space systems projects, and higher manufacturing costs associated with ramping production.
Positives in Q1 included $1.4 billion in contracts to support Poland’s air and missile defense systems, and the company has recently signed memorandums of understanding for work in Romania and Lithuania. Its backlog is currently at $92.8 billion, which it says is “inclusive of strong international bookings.”
Looking ahead, the mean analyst price target is at $540.90, implying 3.6% upside potential.
Defense Stock #3: Kratos Defense & Security Solutions (KTOS)
Kratos Defense & Security Solutions (KTOS) is a leading company as it pertains to unmanned aerial systems (UAS). These drone systems are in high demand as military conflict increasingly relies on drones. Plus, last week, Defense Secretary Pete Hegseth announced several initiatives to increase American production of drones and military training on these systems.
KTOS stock is up 98% in the year to date, and new European contracts could push it much higher.
In Q1, Kratos beat earnings estimates on both the top line and the bottom line. EPS came in at $0.12, up from $0.11 in the prior-year period and beating estimates of $0.09.
Analysts’ mean price target at $46.77 is lower than the current share price, but recent drone-related initiatives could soon see firms raising their price targets.
