Leonardo: Increasing Fair Value Estimate in Anticipation of Higher Defense Spending in Europe

After recently raising our fair value estimate in anticipation of European defense spending exceeding NATO’s 2% target, we are revising our projections upward. Given recent developments, including escalating discussions about a potential US pullback and increasing pressure from Washington, D.C., for Europe to boost its defense budgets, we now expect European defense spending to reach 3.1% of GDP by 2029 (previously 2.4%) and 3.5% by 2032 (previously 2.8%). We are raising Leonardo’s fair value estimate to EUR 42.4, as it will benefit from higher European defense spending, particularly in electronics and its land vehicle JV with RHM, and even more if Europe implements a debt break for defense. Italy and Spain, given their macroeconomic constraints, would otherwise struggle to meet the 2% GDP target by 2028. Italian Prime Minister Giorgia Meloni emphasized the EU's need to take further steps beyond simply excluding defense spending from fiscal rules.