Bank of America Corp. is picking new favorites in the European defense sector as the Iran war highlights the importance of missile systems and drones.
Analysts led by Benjamin Heelan said they now prefer companies that help build the systems that detect, track and shoot down incoming threats — rather than tank and artillery makers.
The shift is “structurally positive” for BAE Systems Plc, Thales SA, Leonardo SpA, Kongsberg Gruppen ASA and Hensoldt AG, they wrote, upgrading Hensoldt to buy from neutral and lifting the price targets for BAE and Kongsberg.
At the same time, they lowered their price targets on Germany’s tank and ammunition heavyweight Rheinmetall AG and gearbox maker Renk AG. Sweden’s Saab AB, which makes fighter jets, was cut to hold on valuation concerns.
The fighting in the Middle East and Ukraine has underscored the importance of drones and artificial intelligence systems for NATO. Iran launched ballistic missiles targeting a joint US-UK military base 2,500 miles (4,000 kilometers) away in Diego Garcia on Friday, a range that could put major European cities at risk.
While unsuccessful, the attack on the Diego Garcia base “reinforces the urgency of EU air defense investment, supporting upside across fighter aircraft, missiles, radars and advanced ground-based systems,” Heelan wrote.
Demand is accelerating for “integrated solutions” that include ballistic, cruise and hypersonic missile defense, as well as aircrafts and anti-drone systems, he wrote. Such companies are reporting “strong inbound interest from Gulf states and rising order expectations from European governments,” he said.
A Goldman Sachs Group Inc. basket of European defense names fell as much as 3.2% on Thursday, trimming 2026 gains to around 11%. Leonardo, BAE and Kongsberg are the only stocks in the basket that haven’t taken a hit this month.
Saab dropped as much as 5.8% following the BofA downgrade on Thursday and Renk was also among the worst performers. Rheinmetall declined as much 3.1%, while fellow-ammunition producer CSG NV tumbled after its annual results.
Written by: Isolde MacDonogh @Bloomberg
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