LDO: European Defense Sector Momentum And Satellite Joint Venture Will Shape Outlook

Key Takeaways

• Heightened global defense demand and strategic international expansion are driving sustained growth, diversified revenue streams, and increased business resilience.
  
• Innovation in digital defense, AI, and operational efficiency is boosting profit margins and positioning Leonardo as a leader in next-generation defense technologies.
  
• Structural weakness in Aerostructures, integration risks, and rising global competition threaten margins and profitability, despite short-term growth from defense spending increases.

Catalysts

An industrial and technological company, engages in the helicopters, defense electronics and security, cyber security and solutions, aircraft, aerostructures, and space sectors in Italy, the United Kingdom, rest of Europe, the United States of America, and internationally.

• The company is poised to benefit from accelerating global defense spending and heightened geopolitical instability, particularly in Europe and among NATO countries, as highlighted by robust order growth (9.7% YoY) and increased guidance for future order intake and revenues. These structural shifts are expected to translate into sustained top-line growth and higher backlog conversion.
  
• Leonardo's strong push into cybersecurity, AI, and digital defense electronics-bolstered by targeted acquisitions and significant order growth (20%+ CAGR in cyber division)-aligns with the increasing demand for next-generation infrastructure in both military and civil sectors, supporting higher-margin revenue streams and future earnings expansion.
  
• Ongoing operational optimization, digitalization of manufacturing processes, and a company-wide "capacity boost" program are yielding measurable gains in profitability and efficiency, evidenced by EBITA and free cash flow growing faster than revenues. This trajectory suggests improving net margins and cash conversion over the medium term.
  
• Strategic expansion into international markets (US, Middle East, Asia-Pacific) and recent M&A activity (such as the acquisition of Iveco Defence) diversify revenue streams and reduce exposure to domestic political cycles, enhancing resilience and setting up for stronger, more stable long-term revenue and earnings growth.
  
• Leonardo's leadership in innovation-via multi-domain capabilities (drones, next-gen aircraft, integrated air defense, and sustainable aerospace solutions)-positions it at the forefront of multi-decade military modernization and dual-use technology adoption, underpinning future order visibility and the potential for premium valuation multiples as the market recognizes the long-term earnings power.

Leonardo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Leonardo's revenue will grow by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.6% today to 6.6% in 3 years time.
• Analysts expect earnings to reach €1.5 billion (and earnings per share of €2.68) by about September 2028, up from €1.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.9x on those 2028 earnings, up from 27.1x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 40.8x.
• Analysts expect the number of shares outstanding to grow by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.64%, as per the Simply Wall St company report.

Leonardo Future Earnings Per Share Growth

Risks

• Persistent structural weakness in the Aerostructures division-with ongoing EBITA losses, slow revenue rebound, and breakeven unlikely before 2029 even under optimistic scenarios-suggests continued low-margin exposure and cash drain, which could weigh on group profitability and net earnings for years.
  
• Leonardo's ability to realize its ambitious capacity boost plan depends heavily on successful operational efficiency gains and flexible scaling; failure to achieve these targets could necessitate unsustainable recurring investment in engineering/manufacturing, risking margin compression and negative impacts on cash flow.
  
• Accelerating defense budgets in Europe/NATO are supporting near-term growth, but long-term risks remain from political cycles, potential future shifts toward anti-military policies, or decarbonization priorities (especially in the EU), which could create volatility or contraction in Leonardo's addressable market and thus threaten top-line growth.
  
• Heightened M&A activity and major integrations-such as the Iveco acquisition and multiple JVs-could bring execution and synergy risks; any delays, cost overruns, or underperformance in integrating new business lines may erode anticipated EBITA synergies and impair return on invested capital.
  
• Rising global competition, particularly from rapidly developing Asian and Middle Eastern defense technology firms and commercial tech entrants into cybersecurity and dual-use domains, may pressure Leonardo's market share and pricing power over time, impacting both revenue growth and long-term margins.

Valuation

• The analysts have a consensus price target of €53.987 for Leonardo based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €64.0, and the most bearish reporting a price target of just €35.3.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €23.1 billion, earnings will come to €1.5 billion, and it would be trading on a PE ratio of 27.9x, assuming you use a discount rate of 10.6%.
• Given the current share price of €49.2, the analyst price target of €53.99 is 8.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.