JPMorgan analysts have highlighted further upside at the likes of BAE Systems PLC (LSE:BA.) and Babcock International PLC (LSE:BAB) as Europe plays catch up in its efforts to rearm.
Europe’s rearmament cycle, sparked by the outbreak of the Ukraine war in 2022, is expected to last for at least another decade yet, according to JPMorgan.
“Across European defence companies we see strong earnings growth, upside risk to consensus, and the potential for stocks to re-rate further” as a result, analysts said.
This includes BAE Systems, for which JPMorgan had a share price target of 1,400p, implying a 9% upside on Tuesday’s close, alongside Italy's Leonardo and Germany's Rheinmetall.
Babcock was also highlighted, with analysts noting the firm had been placed on a positive catalyst watchlist as earnings were seen beating consensus estimates between 2025 and 2028.
“A new political consensus is emerging across Europe,” analysts said.
Recent commentary from senior figures across the continent urging higher defence spending is set to address roughly 30 years of under investment, the bank added.
This should buoy orders from European defence firms, after backlogs across the industry have already jumped in the two years since the war broke out in Ukraine.
“These backlogs provide greater visibility, underpin stronger top-line growth prospects and, in our view, justify higher valuation multiples for the sector,” JPMorgan added.