Defence Stumbles

It is worth repositioning the European Aerospace & Defence sector in the bigger scheme of things: a combined market cap of €750bn or more than €800bn with Kongsberg and Saab (not yet covered), capex of about €12bn in 2026 and FCF of about €24bn. This is clearly more attractive than the Autos industry with a market cap at €370bn and capex of €67bn. However, consider SpaceX alone with a market cap twice as big as the whole of European A&D and planned capex for its new launchpad of $100bn. European defence remains a minnow.

The opportunity created by the fast rebuilding of European defence is certainly a huge one, but even the €500bn dedicated by Germany to a Bundeswehr refoundation over a decade pale next to the US accelerated efforts under the Trump administration. Say a $1 500bn annual US defence budget.

Besides the Ukrainian trigger to a European awakening, the Iran war has shown that Europe’s defence is already awfully stretched. It cannot even be in two theatres simultaneously, whereas its combined armies imply that it should, if it were ever unified. The lasting Iran conflict confirms that Europe is exposed to conflicting demands on its limited defence resources. This is not good news for vendors if spending arbitrages ensue that would curtail various programmes. France’s defence budget, hitherto not impacted by spending cuts, may just not survive the next presidential election for instance (May 2027). Similarly the Starmer government has seen its defence spending plans hamstrung by deficits. Etc.

In a nutshell, European governments need more kit (good for vendors), urgently (not so good for working capital), hitherto failed to coordinate (not good for volume), and are facing faster changing threats than anything anticipated back in 2022 (not good for decision making). Investors were wondering whether to back drones rather than guns, but the 2026 reality is about air defence, how to protect populations/key assets/wide territories and about cyber defence. 

The quick shifts in technology led defence can legitimately be construed as a risk factor for the industry at large. This comes with lower valuations.

This observation is at odds with the expected surge in profits in AlphaValue projections.