Europe’s Re Armament Meets a Leaner Leonardo

Investors used to mention Leonardo only when they talked about Italian politics or Boeing 787 problems. That changed in 2024, when Europe transitioned from decades of defense cuts to an open spending cycle. Leonardo’s order book jumped, debt fell, and the share price doubled. Then May 2025 arrived: the stock spiked to €55 on war‑driven headlines, profit‑takers moved in, and the quote slid to the mid‑€40s. The pullback looks like a gift.

I argue the market is still pricing Leonardo as a high‑beta Italian contractor instead of a broad European play on multi‑domain warfare. Orders grew 20 % in Q1, revenue 15 %, EBITA 18 %, while net debt dropped 28 % after a timely asset sale. Rating agencies noticed: S&P lifted the group to full investment grade in April, removing a stigma that had lingered since 2013. My 12‑month target of €60 implies about 30 % upside, with a rising dividend as a kicker. The call is Strong Buy.

A Broader Arsenal Than The Headlines Suggest

Europe’s defense wish list is long and complex. Countries need armor, but they also need helicopters to move troops, radars to see threats, satellites to share data, and drones to fill gaps. Leonardo touches each of those needs. Helicopters remain its crown jewel, with the AW139 and AW169 lines booked solid for civil and military users. Defense electronics, once a sleepy division, now delivers AESA radars for Eurofighter and anti‑drone gear for army guards. The new Space Division folds in Telespazio and Thales Alenia Space stakes, turning what was a passive holding into an active drive for secure European constellations.

Investors often focus on where Leonardo is not dominant: armored vehicles and heavy munitions. Management responded by forming a 50‑50 venture with Rheinmetall this winter to build fighting vehicles for Italy and export clients. The structure lets Leonardo bolt its sensors and active protection onto Rheinmetall hulls without shouldering full R&D risk. A similar logic drives the agreement with Turkey’s Baykar on high‑altitude drones. Baykar brings proven airframes; Leonardo adds NATO‑grade avionics, datalinks, and certification expertise. Leonardo keeps capital spending in check while gaining optionality in segments it once lacked.

Macro Tailwinds With Time On Their Side

Russian aggression pushed many NATO states to pledge 5 % of GDP for defense, yet most still sit closer to 1.6 %. Italy, Spain, and several Nordics have years of budget hikes ahead. Germany hard‑wired €100 billion into defense and will exempt war spending above 1 % of GDP from fiscal rules. Even if the front in Ukraine calms, ammunition stocks and electronic warfare gear need years to rebuild. Those purchases tend to be long term contracts, locking in revenue visibility. Management quotes a backlog‑to‑sales ratio above 2.5x, equal to more than 30 months of work, versus barely 20 months in 2019.

Another macro force is the digital pivot inside armed forces. Allies want every sensor, drone, jet, and ship to feed data into a single battlefield picture. Leonardo’s Industrial Plan calls that “digital continuum” and assigns €1.3 billion of self‑funded R&D to it through 2029. It copies how U.S. companies show double‑digit margins by owning the software layer on top of the hardware. If Leonardo can close even half of that margin gap, profitability will increase again.

Q1 Results Show Execution

In the March quarter Leonardo booked €6.9 billion in new orders, lifting backlog to €46 billion and pushing the book‑to‑bill to 1.7. Revenue rose to €4.2 billion as helicopter deliveries and electronics programs accelerated. EBITA reached €211 million, translating to a 5 % return on sales in what is seasonally the weakest quarter. Adjusted for the divested Underwater Systems unit, EBITA growth hits 18 %.

Free cash flow was negative, as usual in Q1, but the drain improved by €41 million to –€580 million. Management still aims for €870 million positive FCF in 2025, a figure that looks credible given the record orders and tight capital spending control. Net debt sat at €2.1 billion, down from €2.9 billion a year earlier. A €500 million bond matured in March and was paid with cash on hand, slicing interest costs. The target is €1.6 billion net debt by December, near 1x EBITDA. That leverage improvement was the missing piece in past years and supports a higher multiple.

Guidance Has Room For Upside

Full‑year goals call for revenue of about €18.6 billion, EBITA of €1.66 billion, and FCF near €0.87 billion. Those goals rest on mid‑single‑digit top‑line growth and stable margins. Yet Q1 already delivered stronger growth, and cost savings of €1.8 billion through 2029 have barely started. Helicopter mix is tilting toward military variants and support contracts, both higher margin. Aerostructures is still losing money on Boeing parts, but management cut output to match demand and expects break‑even in 2 years. Even a modest recovery there can add 30 basis points to group margin.

Beyond 2025 the plan targets €24 billion revenue and €2.8 billion EBITA by 2029. That implies a 7 % compound revenue growth and 13 % EBITA growth. The path runs through booked backlog, yet the plan excludes upside from GCAP fighter production, which could reach €40 billion by 2035. Early funds flow already: concept phase workshare is valued at €300 million, with heavy engineering to follow. Every quarter that program stays on schedule nudges earnings forecasts higher.

Valuation Still Trails Peers

At €46 the stock changes hands for roughly 20x forward earnings and 11x EV/EBITDA. Rheinmetall, the market’s ammo darling, fetches to 65x earnings. BAE trades near 30x, Thales about 23x. Leonardo’s discount stems from lower margins and an Italian country tag. Debt was another drag, now largely gone. If EBITA margin climbs to 10 % by 2027—a target that looks reasonable—the market should reward that progress with a peer multiple near 25x. On my model that points to a share price near €60 within 1 year and €70 within 3 years, without heroic growth assumptions.

Income investors might shrug at the 1.1 % dividend, yet last year’s payout doubled and still consumes under one‑third of earnings. Management hinted that further hikes will track profit. A 15 % annual raise would push the yield toward 1.7 % on today’s price by 2027. The share repurchase plan could lift total shareholder return above 4 %.

Competitor Check Adds Perspective

Rheinmetall’s backlog is 9x times revenue, but 50 % of that sits in one product: large‑caliber rounds. If peace breaks out, restocking slows. Leonardo’s portfolio is far wider. BAE owns lucrative U.S. contracts, yet its exposure to submarines and temp shelters may be capped by Pentagon posture shifts. Leonardo lacks the political clout in Washington but gains from export customers that prefer diversified supply lines. Thales manufactures high-quality radars and secure communication systems, but 35% of its revenue comes from rail signals and digital IDs. Investors paying a defense premium for Thales must also own a ticketing business. Leonardo is almost pure defense after shedding Fi‑nal shares of civil electronics. That clarity helps the market frame value.

Saab’s Gripen fighter is overmatched by F‑35 in major tenders, while its Carl‑Gustaf rocket line is at full capacity. Leonardo avoided such single‑product concentration. Its trainer jet, the M‑346, keeps winning Air Force academies from Poland to Qatar, and upgrade kits drive steady after‑sales work. Diversification, once seen as scattered, now looks like resilience.

Risks Are Visible And Manageable

A cease‑fire in Ukraine could soften order momentum. Still, armies will spend years refilling depots and modernizing C3I systems. Leonardo’s backlog bought time. The bigger risk sits in execution. GCAP, Baykar drones, and the Space refresh involve new supply chains. Delays would affect its 2027‑28 numbers. Management mitigates by spreading capital expenditures and insisting on firm export commitments before scaling factories.

Political risk in Italy deserves mention. Rome owns about 30 % of Leonardo and might lean on it for domestic jobs or price concessions. Yet the same stake ensures government support for exports and financing. Credit spreads on Italian sovereign debt narrowed this year. Currency swings pose another threat. Half of Leonardo’s sales are in dollars or linked currencies. The firm hedges most exposure near EUR/USD1.08 , so earnings volatility stays low unless the euro surges.

ESG Matters In Military Contracting

Defense faces new scrutiny under ESG screens, yet NATO now frames weapon makers as “defenders of democracy.” Large asset managers that once shunned war stocks added them back to portfolios in 2024. Leonardo releases a separate sustainability report, promising carbon-neutral operations by 2050 and green bonds tied to Scope 1–2 cuts. Investors caring about ESG optics may find Leonardo an easier sell than ammo‑pure plays, since much of its portfolio—cyber defense, rescue helicopters, satellite earth monitoring—serves civil needs.

A Path To Re‑Rating

The next catalyst could be Q2 results in early August. Management hinted at new export helicopter deals and a possible drone framework before year‑end. Each contract booked at 10 % or higher margin supports the 2025 guide and chips at the valuation gap. Watch also for firm cost-cut updates; a second tranche of savings should land by September.

If shares climb back to €55 quickly, fresh buyers may hesitate. I would still see fair value above that level and would add on dips. A multi-year growth period combined with a secure balance sheet is rare in Europe. Leonardo offers both but still feels misunderstood.

Conclusion: Strength Built For The Long Run

The European defense revival is likely durable. Leonardo spent the down years fixing leverage and line‑up holes. Those repairs now meet a demand boom. The company’s portfolio matches the new procurement map: helicopters for rapid lift, radars for layered air defense, space assets for secure comms, and upcoming drones that close the circle. Financial traction backs the narrative, with rising cash flow and falling debt already in the ledger.

The market still prices Leonardo as if the cycle is fragile and the company a laggard. The facts point the other way. I expect a re‑rating as results stack quarter after quarter. Until that reset happens, the shares provide a clear upside path with limited downside thanks to backlog cover. For investors seeking exposure to Europe’s defense build‑out without paying Rheinmetall’s premium, Leonardo is hard to beat.

I am long the stock and view current levels as a chance to build a position before the second act of this turnaround plays out.