Thales, Rheinmetall or Leonardo: best European defense stock in 2026?

Europe's rearmament is no longer a hypothesis — it is a budgetary reality here to stay. Faced with geopolitical tensions and the gradual withdrawal of the American security umbrella, European governments have crossed the Rubicon. Emmanuel Macron is targeting military spending of 3 to 3.5% of GDP. Germany has unlocked hundreds of billions for the Bundeswehr. The United Kingdom has ordered £1.6 billion worth of Thales missiles for Ukraine.

In 2025, European defense stocks posted historic gains: Thales rose 69% over the year, Leonardo 93%, Rheinmetall 152%. On a trailing 12-month basis as of 9 March 2026, performance is more moderate — Rheinmetall +43%, Leonardo +37%, Thales +3% — as the comparison base now incorporates a significant portion of the 2025 rally. The sector is consolidating, but the underlying structural trends remain firmly in place.

More importantly for fundamental analysis: valuations have shifted substantially since end-2025. Thales in particular has undergone a spectacular transformation in its fundamentals. Which company now offers the best value/growth balance for a long-term investor? Here is my full comparison, updated with FactSet data as of 9 March 2026.

Three European defense champions

Thales (HO): France's defense electronics leader

Thales is Europe's leading provider of electronic equipment and systems for defense, aerospace and transportation. The company employs 84'958 people and generates €22.1 billion in revenue (TTM).

Business breakdown:

• Defense and security systems: 53.3% (command systems, electronic warfare, drones, air defense)
• Aerospace systems: 26.6% (avionics, satellites, payloads)
• Digital identity and security solutions: 19.6%
• 35% stake in Naval Group (naval defense and nuclear construction)

Strengths: A remarkable fundamental turnaround — earnings per share surged +61.8% (TTM), erasing the difficulties of 2025. The P/E has fallen to 29.61, making Thales the valuation champion of the trio. FCF yield of 5.16%, the highest of the three. ROE of 21.63% (TTM). The lowest volatility (beta 0.76, 1Y standard deviation 2.03%). Record order backlog and sector diversification (cybersecurity, space).

Weaknesses: Revenue growth is the most modest of the three (+7.58% TTM). Payout ratio of 46.62% leaves less dividend growth runway than Leonardo. 12-month trailing stock performance of only +2.64% (lagging peers).

Rheinmetall (RHM): Germany's armored vehicles and ammunition specialist

Rheinmetall is the Bundeswehr's strategic supplier. With €11.0 billion in revenue (TTM) and 28'539 employees, the group focuses on armored vehicles, weapon systems and ammunition. Its market capitalization has now exceeded Thales at €72.9 billion.

Positioning: Rheinmetall is a direct beneficiary of Germany's rearmament program. The company supplies Leopard 2 tanks and a full range of artillery ammunition in high demand in the Ukraine context. Its order book is surging, driven by Bundeswehr expansion and Ukraine deliveries.

Strengths: Explosive revenue growth (+24.61% TTM, +34.2% operating income). Earnings per share +45.2% TTM. Best-in-class profitability (ROE 21.48%, operating margin 13.56%). Strongest balance sheet among the three (debt/equity 0.52). Best 2-year Sharpe ratio (1.67). Analyst upside potential of +37% to target price of €2'180.

Weaknesses: Extreme valuation — P/E 83.84, P/FCF 759.16 — with zero margin for error. Negligible dividend (0.51% yield). Heavy reliance on government orders. Severe correction risk if defense budgets normalize or a Ukraine peace deal materializes.

Leonardo (LDO): Italy's defense and aerospace conglomerate

Leonardo is Italy's defense and aerospace champion. With 60'468 employees and €18.7 billion in revenue (TTM), the company covers a diversified range from helicopters to electronic defense systems. The stock gained +37.21% over the trailing 12 months, with notable recent acceleration (+25% over the last 3 months — the best of the three).

Key activities: Military and civil helicopters, avionics, defense electronics, cybersecurity, space systems. Leonardo is a partner in the Eurofighter program and a systems supplier for the F-35.

Strengths: Strongest recent price momentum (+25% over 3 months). The most conservative payout ratio (28.37%), leaving maximum room for future dividend growth. Reasonable valuation (P/E 32.21). Best balance sheet (debt/equity 0.47). Balanced exposure to both defense and civil aerospace.

Weaknesses: Valuation less attractive than at end-2025 (P/E has risen from 27 to 32 with the +18.5% stock gain since December 2025). Lowest operating margin (6.25%). Modest earnings growth (+5.99% TTM). FCF yield of only 2.63%, well below Thales. Weakest interest coverage (4.97x).

Financial metrics comparison

Key figures at a glance

Valuation: Thales is now the value champion, Rheinmetall still overpriced

The most striking development since end-2025: Thales has reversed its valuation profile. With EPS up +61.8% (TTM), the P/E has fallen from 69 to 29.61 — making Thales the cheapest of the three on most ratios. Leonardo, whose stock gained +18.5% since December 2025, now trades at a P/E of 32.21, above Thales.

Valuation rating (FactSet score: Thales 43, Leonardo 34, Rheinmetall 25):

• Thales: ★★★★★ (P/E 29.61, forward P/E 22.79, FCF yield 5.16%, EV/EBITDA 15.5 — best overall valuation, remarkable fundamental transformation)
• Leonardo: ★★★☆☆ (P/E 32.21 reasonable, attractive P/B and P/S, but FCF yield of 2.63% less impressive)
• Rheinmetall: ★☆☆☆☆ (P/E 84, P/FCF 759 — speculative pricing with zero margin for error)

Profitability and growth: Rheinmetall and Thales neck and neck

The biggest surprise of this update: Thales has staged a spectacular earnings recovery. EPS grew +61.8% (TTM), fully erasing the −50.57% decline reported in December 2025. ROE has reached 21.63%, fractionally above Rheinmetall (21.48%). The two companies are now neck and neck on return on equity.

Profitability rating:

• Rheinmetall: ★★★★★ (operating margin 13.56%, ROA 6.13%, revenue growth +24.61% — growth engine still firing)
• Thales: ★★★★☆ (ROE 21.63%, EPS +61.8%, FCF yield 5.16% — strong improvement vs end-2025)
• Leonardo: ★★★☆☆ (decent profitability but modest earnings growth of +5.99%)

Dividends: Leonardo's payout is most conservative, Thales offers the highest yield

Another notable development: Thales' payout ratio has fallen from 72.61% to 46.62% thanks to the earnings recovery. Dividend safety has improved materially.

Dividend rating:

• Leonardo: ★★★★☆ (payout 28.37% = maximum headroom for future dividend growth)
• Thales: ★★★☆☆ (highest yield at 1.57%, payout 46.62% significantly improved — good progress)
• Rheinmetall: ★★☆☆☆ (symbolic yield of 0.51%, company prioritizes growth reinvestment)

Financial strength: Leonardo and Rheinmetall best capitalized

Thales' balance sheet has also improved: debt/equity fell from 1.02 to 0.77 since end-2025. Leonardo remains the strongest on this measure.

Financial strength rating:

• Leonardo: ★★★★★ (debt/equity 0.47, best overall balance sheet)
• Rheinmetall: ★★★★☆ (debt/equity 0.52, excellent interest coverage 11.56x)
• Thales: ★★★☆☆ (debt/equity 0.77 improving, interest coverage 9.53x adequate)

Momentum: Leonardo accelerates, Thales consolidates

The momentum picture has shifted since end-2025. On a trailing 12-month basis, Rheinmetall leads (+43%) but Leonardo (+37%) has closed the gap. Over the last 3 months, Leonardo clearly dominates (+25%), while Thales confirms its technical rebound (+8%).

Note: analyst recommendation scale from 1 (strong buy) to 5 (sell).

Momentum rating:

• Leonardo: ★★★★★ (strongest recent acceleration +25% over 3 months, best short-term momentum)
• Rheinmetall: ★★★★☆ (+43% over 1 year, Sharpe 1.67, best analyst rating at 1.25)
• Thales: ★★☆☆☆ (weak 1-year +2.64%, defensive beta 0.76, lowest volatility — potential opportunity signal)

My recommendation by investor profile

Value investors: Thales

Thales (HO) ★★★★★

Thales has undergone a remarkable fundamental transformation. EPS surged +61.8% (TTM), dropping the P/E to 29.61 — the lowest of the three. FCF yield reaches 5.16%, ROE is 21.63%, the operating margin has improved to 10.02%. The FactSet value score stands at 43, best in group. Analyst price target at €292 implies +21% upside from the current €241.

Suggested allocation: Core position in a defense portfolio. The stock's recent underperformance vs peers represents a potential entry opportunity for patient investors.

Dividend growth investors: Leonardo

Leonardo (LDO) ★★★★☆

Leonardo is the clear choice for investors focused on future dividend growth. With a payout ratio of only 28.37% — the most conservative of the three — the company has maximum headroom to grow its distribution. The recent price momentum (+25% over 3 months) confirms improving investor sentiment. A reasonable P/E of 32.21 and a clean balance sheet (debt/equity 0.47) complete the picture.

Suggested allocation: Complementary position alongside Thales for dividend growth exposure and diversification.

Growth and speculative investors: Rheinmetall

Rheinmetall (RHM) ★★★☆☆

The fundamental growth story remains intact: +24.61% revenue growth, +45.2% EPS, 13.56% operating margin, record order book. Analysts see +37% upside to a €2'180 target.

However: P/E of 83.84 and P/FCF of 759 are bubble-level multiples. The slightest disappointment on defense budgets or any progress toward a Ukraine ceasefire could trigger a violent correction.

Suggested allocation: Maximum 5 to 10% of portfolio, satellite speculative position with a recommended stop-loss at −20%.

Conclusion

European rearmament is a structural trend spanning 10 to 15 years. All three companies analyzed benefit from this tailwind, but with very different risk/reward profiles.

The key development in this March 2026 update: Thales has staged a spectacular fundamental recovery. After being penalized in 2025 by declining earnings, the stock now posts the best valuation metrics of the trio (FactSet score 43). This transformation changes the rankings — Thales is now the top pick for value-oriented investors regardless of their tax jurisdiction.

Summary verdict:

• Value investors: Thales — best fundamentals, best valuation, meaningful analyst upside
• Dividend growth investors: Leonardo in complement — maximum payout headroom (28%), strong recent momentum
• Speculative/growth profile: Rheinmetall as a satellite position only — strong growth story but extreme valuation

Defense stocks do not suit all ethical profiles. Each investor must decide according to their personal values. In my view, supporting European strategic autonomy against authoritarian regimes is a defensible investment.

Frequently asked questions

Which is the best European defense stock to buy in 2026?

As of March 2026, Thales stands out as the best-value pick: P/E of 29.61 (the lowest of the three), FCF yield of 5.16%, EPS up +61.8% (TTM), ROE of 21.63%. The FactSet value score of 43 places it well ahead of Leonardo (34) and Rheinmetall (25). Analyst consensus targets €292, implying +21% upside from current levels.

Is Rheinmetall still worth buying after its massive 2025 rally?

The operational fundamentals remain impressive — revenue growth of +24.61% (TTM), EPS +45.2%, operating margin of 13.56%, record order backlog. However, the valuation is extreme: P/E 83.84, P/FCF 759.16. There is no margin for error. Any slowdown in German defense spending, a peace agreement in Ukraine, or an earnings miss could trigger a 30 to 50% correction. Rheinmetall belongs in a portfolio only as a small speculative satellite position, not as a core holding.

Are European defense stocks compatible with ethical investing?

A legitimate question. All three companies manufacture weapons systems. However, their primary customers are NATO member democracies. European rearmament aims to guarantee strategic autonomy against authoritarian regimes. Leonardo and Thales also have significant civilian activities (commercial avionics, satellite systems, cybersecurity). Each investor must make their own judgment based on personal values — there is no universal answer.

What is the correction risk after the 2025 gains?

High risk for Rheinmetall: P/E 84, P/FCF 759 are bubble multiples. A diplomatic resolution of the Ukraine conflict or a revision of defense budgets could trigger a correction of 30 to 50%. Moderate risk for Thales: with a P/E back at 29.61, the stock offers meaningful valuation cushion. The current price of €241 is well below the analyst target of €292. Intermediate risk for Leonardo: the +18.5% gain since December 2025 has reduced the margin of safety (P/E moved from 27 to 32).

Are the dividends safe in this sector?

Yes. All three companies have record order backlogs and robust cash flows. Key points by stock: Leonardo (payout 28.37% — maximum safety, large room for future dividend growth); Rheinmetall (payout 42.81% — secure, but modest dividend as company reinvests for growth); Thales (payout 46.62% — significantly improved from 73% at end-2025, safety margin fully restored).

How long will European rearmament last?

European rearmament is a structural trend spanning 10 to 15 years. The 2% of GDP NATO defense target has not yet been met by most European members, and several countries now aim for 3%. Major programs — next-generation Eurofighter, Franco-German SCAF, naval fleet modernization — span multiple decades. The order backlogs of all three companies are at record highs, securing future revenues regardless of short-term developments in Ukraine.

Sources and data

Financial data: FactSet (data as of 9 March 2026, TTM = trailing twelve months)

Official investor relations:

• Thales: Thales investor relations
• Rheinmetall: Rheinmetall investor relations
• Leonardo: Leonardo investor relations

Methodology: Valuation ratios (P/E, P/B, P/S, P/FCF) use TTM (trailing twelve months) data. Growth figures compare current TTM vs prior TTM. The 5-star ratings by category compare the relative performance of the three companies on the key metrics of each dimension (valuation, profitability, dividends, financial strength, momentum). Overall FactSet scores (Value Rank, Fundamentals, Core Combination) are sourced from the Stock Compare module.