Several countries have been beefing up their defense budgets in light of mounting geopolitical tensions, and Goldman Sachs has named several European stocks to play the theme right now. “We believe we are in the middle of a super-cycle in defense spending,” the investment bank’s analysts, led by Victor Allard, wrote in an April 9 note, adding that European defense spending in particular is expected to grow at a compound annual growth rate of 4.5% in the 2022-2027 period, up from 3% in 2015-2020. European defense stocks “have closely tracked super-cycles and are now “trading at peak multiples (20x 12-month forward price-to-earnings) vs history,” which translates to a 45% premium to the benchmark Stoxx 600 index , the bank’s analysts noted. “We typically see a period of re-rating for 2 years followed by trading at peak multiples for 1-2 years before the growth cycle contracts again, with multiple contraction happening as growth rates decelerate,” they added. Though Goldman is “cautious on valuations as we approach 2025” and “conclude that European defense stock valuations likely present more downside than upside risk at this juncture,” the Wall Street bank still sees opportunities in several segments and stocks. Stocks Goldman’s analysts said they “increasingly favour stocks exposed to long-term secular growth themes with superior visibility on growth.” They highlighted French company Thales , which they like for its “robust organic growth profile due to its exposure to French military spending.” The investment bank has a buy call on stock at a 12-month target price of 170 euros ($180.99), giving it 7.6% potential upside. Other stocks with an exposure to the defense industry on Goldman’s buy-rated list include aerospace names Rolls-Royce Holdings (also on its “conviction list”) and Airbus . Elsewhere in the arms manufacturing space, Goldman is optimistic on German company Rheinmetall on the back of its expectations of “a record year for orders based on our granular work on the 2024 German defense budget.” The bank has increased its 12-month price target on the stock by close to 60% to 606 euros, giving it nearly 13.4% upside potential. — CNBC’s Michael Bloom contributed to this report.
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