European Defense Stocks: How to Screen the Rearmament Wave

European defense spending has accelerated dramatically since 2022. NATO member commitments, Germany's Sondervermögen defense fund, and broader European rearmament programs are translating into long-duration government contracts across the defense and security supply chain. For investors screening European equities, defense is one of the few sectors where revenue growth visibility extends 5–10 years with high conviction.

This guide covers how to screen for European defense stocks systematically — which companies qualify, what financial metrics distinguish sustainable compounders from contract-dependent cyclicals, and what a practical defense screen looks like in 2026.

The structural shift in European defense spending

European NATO members spent an average of 1.6% of GDP on defense in 2021. The current trajectory puts most of Western Europe above 2% of GDP by 2026–2027, with several countries — Poland, Greece, the Baltics, and increasingly Germany — targeting 3% or above.

In absolute terms, this represents hundreds of billions of euros in incremental annual spending compared to the 2019 baseline. That spending flows through a defense industrial supply chain that spans:

• Prime contractors (Rheinmetall, Leonardo, Thales, Saab, BAE Systems)
• Systems integrators and electronics (Hensoldt, Diehl, KNDS)
• Ammunition and ordnance (Nammo, Chemring, Rheinmetall's ammunition divisions)
• Cybersecurity and C4I (Airbus Defence, Leonardo DRS, Thales Group)
• Logistics and support services (Babcock, QinetiQ, Leidos Europe)

The key investment insight: defense contracts are long-duration and visible. A government signing a multi-year artillery contract creates revenue visibility that most industrial businesses cannot match. This revenue visibility supports premium valuations relative to comparable industrials — but only for companies with confirmed order books, not those relying on anticipated contracts.

How to identify European defense stocks

"Defense" is not a standard screener sector. Most screeners classify defense companies under Aerospace & Defense or within the broader Industrials sector. This means a straight sector filter captures both defense and non-defense aerospace companies.

Approach 1 — Sector filter + manual review

Filter for Industrials / Aerospace & Defense, then review the results for companies with >30% revenue from government defense contracts. This is labor-intensive but accurate.

Approach 2 — Known pure-plays + screening by fundamentals

Start with a known list of European defense companies, then screen that universe by fundamental criteria. This is faster and avoids the sector definition problem.

Major European defense companies by exchange:

Smaller and mid-cap names to add:

Note: several of the largest European defense prime contractors are either partially state-owned (limiting float liquidity) or have defense as one segment of a diversified conglomerate. Screening for "pure play" exposure requires verifying what share of revenue comes from defense.

Financial metrics that matter for defense stocks

Defense companies have different financial characteristics from standard industrials. Screen for:

1. Order backlog relative to annual revenue

This is the single most important metric for defense companies that standard screeners do not display. A company with a backlog of 3–5x annual revenue has multi-year revenue visibility — a premium characteristic. A company with 0.5x backlog is highly dependent on new contract wins.

Most screeners do not filter on order backlog. To use this metric: pull results from a fundamental screen, then verify backlog-to-revenue ratios from annual reports for the shortlisted names.

Reference points:

• Rheinmetall: order backlog >5x annual revenue (2024–2025 data)
• Saab: backlog consistently 3–4x revenue
• Chemring: backlog around 1.5–2x revenue

2. Operating margin and margin trajectory

Defense contracts often include fixed-price provisions early in a program that compress margins during ramp-up. Margins expand as production scales. Screen for:

• Current operating margin > 8% (below this suggests ramp-up pressure or poor contract terms)
• Margin trending upward year-over-year (the ramp-up effect should show improvement)

3. Revenue growth rate

With European defense budgets rising sharply, revenue growth above market average is expected for well-positioned prime contractors. Screen for:

• Revenue growth > 10% year-over-year (in line with sector-wide budget increases)
• Note: very high reported growth (>50%) may reflect one-time contract wins rather than recurring expansion

4. Free cash flow conversion

Defense programs are capital-intensive in the early stages. Some companies fund program development from government advance payments (good for FCF) while others fund from their own balance sheet (FCF pressure). Screen for:

• FCF conversion > 70% of net income (high conversion indicates advance payments from customers, not balance-sheet funding)

5. Return on Invested Capital (ROIC)

Long-term, the best defense businesses earn sustainable high ROIC as the installed base of platforms generates maintenance and upgrade contracts. Screen for:

• ROIC > 12% consistently over 3+ years (distinguishes genuine competitive position from contract-by-contract uncertainty)

A practical European defense stock screen

Here is a starting screen for European defense-exposed industrials:

Universe: European exchanges — XETRA, Euronext Paris, BME, Borsa Italiana, Nasdaq Stockholm, Oslo Børs, London Stock Exchange

Filters:

• Sector: Aerospace & Defense (Industrials broad)
• Operating margin > 8%
• Revenue growth (3-year) > 8%
• Market cap > €500M (liquidity floor for institutional names)
• Debt/Equity < 1.5 (excludes over-leveraged program investments)

Sort: By revenue growth descending to surface the highest-growth names.

This screen typically returns 15–30 companies. The output requires manual verification of defense revenue share, since sector filters capture both civilian aerospace and defense names.

How to separate defense beneficiaries from defense-adjacent names

Not all companies in the Aerospace & Defense category are equally exposed to rearmament:

High exposure — companies deriving >60% of revenue from government defense contracts. Revenue is directly tied to budget increases. Examples: Rheinmetall, Saab, Chemring.

Medium exposure — conglomerates where defense is 30–60% of total business. Airbus, Thales, Leonardo fall here — all three have significant civilian aerospace or commercial businesses that dilute pure defense exposure.

Low exposure / thematic — companies with <30% defense revenue or indirect exposure (manufacturers supplying components to prime contractors). These trade on general industrial dynamics more than defense budget cycles.

For maximum rearmament exposure, focus on high-exposure names. For diversification, medium-exposure conglomerates reduce sector concentration.

Country-specific defense opportunities

Germany — the largest rearmament program in Europe

Germany's Sondervermögen (special fund) earmarks €100B for defense modernization, with ongoing annual budget increases. The direct beneficiaries are German-listed defense names.

Key exchange: XETRA

• Rheinmetall (RHM) — the clearest German defense pure-play
• Hensoldt (HAG) — sensors and electronic warfare systems
• Airbus (AIR) — military aircraft and space (EU-listed primary in Germany/France)

Sweden — NATO accession accelerates contracts

Sweden joined NATO in 2024. Defense procurement has accelerated across the Swedish armed forces and Nordic partners.

Key exchange: Nasdaq Stockholm

• Saab (SAAB-B) — Gripen exports, Carl-Gustaf, radar systems

Norway — energy revenues fund defense expansion

Norway's oil wealth funds substantial defense budget increases. Kongsberg Gruppen benefits from both Norwegian contracts and NATO-wide system demand.

Key exchange: Oslo Børs

• Kongsberg Gruppen (KOG) — Naval Strike Missile, Protector remote weapon systems

Poland — highest defense spend as % of GDP in NATO

Poland is the fastest-growing defense market in Europe. The Warsaw-listed PGZ group and international suppliers with Polish contracts are the direct beneficiaries.

Key exchange: GPW Warsaw

• Polski Holding Obronny / PGZ — domestic defense industrial group

United Kingdom — established prime contractors

The UK has a large, mature defense industrial base with publicly listed companies. Less rearmament-driven acceleration than continental Europe, but stable long-duration contract revenues.

Key exchange: London Stock Exchange

• BAE Systems, Babcock International, QinetiQ, Chemring

Valuation considerations for European defense stocks

European defense stocks re-rated significantly in 2022–2024. Many prime contractors now trade at multiples that reflect the structural spending increase that has already been priced in. Investors entering in 2026 are buying a sector that the market has already discovered.

This does not mean the sector is overvalued — it means the easy re-rating from "utilities level" to "growth industrial" multiples has already happened. From here, returns depend on:

1. Continued order book expansion — whether new contracts keep pace with elevated expectations
2. Margin expansion on program ramp — whether fixed-price contracts deliver improved returns as production scales
3. Execution risk — defense programs are complex; cost overruns and delays destroy value

Screen for companies trading at EV/EBITDA below 15x with the fundamental profile described above. Above 20x EV/EBITDA for a defense name requires exceptional order book visibility to be justified — at that level, much of the rearmament cycle is already in the price.

Frequently asked questions

Which European defense stocks have the best fundamentals in 2026?

Rheinmetall, Saab, and Kongsberg Gruppen consistently screen well on order backlog, revenue growth, and margin trajectory. Among smaller names, Chemring and QinetiQ have strong FCF conversion and improving margins. Specific due diligence on order book composition is essential before any position.

Are European defense stocks still a buy in 2026?

The sector has re-rated from historically low valuations to premium industrial multiples. Investors entering now are paying for growth the market has already identified. The investment case depends on whether rearmament spending continues at its current pace and whether individual companies execute on their order books without cost overruns. The macro tailwind is real; individual company execution risk is the differentiating factor.

How do I find European defense stocks below €1B market cap?

Filter for Aerospace & Defense sector with market cap between €200M and €1B on European exchanges. Screen this universe for operating margin above 8% and revenue growth above 10%. The result set requires manual review to verify defense revenue share, but will surface defense-adjacent small and mid-caps that the market is less focused on than the large prime contractors.

Does a European stock screener cover defense-specific metrics like order backlog?

Standard fundamental screeners — including ScreenerHero — cover financial statement metrics: margins, ratios, growth rates, and balance sheet items. Order backlog, which is disclosed in annual report footnotes rather than standardized financial statements, is not typically available as a screener filter. Use a screen to generate a shortlist, then verify backlog data from company reports for the shortlisted names.

Screening another cyclical industrial sector? See European automotive stocks — a distinct cycle-aware screening approach for a sector facing its own structural transition (EVs) alongside normal demand cyclicality.

Screen European industrial and defense stocks → — filter by sector, operating margin, revenue growth, and market cap across all European exchanges. Free, no account required.