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Accelerated European And NATO Defense Spending Will Drive Cyber Modernization

Published
12 Nov 24
Updated
04 Sep 25
AnalystConsensusTarget's Fair Value
€53.99
8.3% undervalued intrinsic discount
04 Sep
€49.50
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1Y
145.2%
7D
2.3%

Author's Valuation

€54.0

8.3% undervalued intrinsic discount

AnalystConsensusTarget Fair Value

Last Update04 Sep 25

With no material changes in net profit margin or revenue growth forecasts, Leonardo's consensus analyst price target remains stable at €53.99.


What's in the News


  • Leonardo and Textron Aviation Defense entered a teaming agreement to offer the Beechcraft M-346N, based on Leonardo's M-346 trainer, for the U.S. Navy Undergraduate Jet Training System program.
  • Leonardo is in advanced talks to acquire Iveco Group's defense unit, with negotiations influenced by Italian government interests and the potential subsequent sale of Iveco's commercial business to Tata Motors.
  • Leonardo submitted the lowest bid of approximately €1.6 billion (including debt) for Iveco's defense unit, partnering with Rheinmetall AG; political factors may favor the bid despite higher competitor offers.
  • Leonardo and SSH Communications Security Oyj signed a Strategic Partnership Agreement granting Leonardo exclusive global (excluding Nordics) rights to embed SSH's Zero Trust and quantum-safe encryption solutions in its defense and government offerings, pending a share issue.
  • Leonardo partnered with Nokia to integrate its MC_linX mission-critical services platform into Nokia’s enterprise solutions, enhancing secure communications for public safety, energy, and railway sectors worldwide.

Valuation Changes


Summary of Valuation Changes for Leonardo

  • The Consensus Analyst Price Target remained effectively unchanged, at €53.99.
  • The Net Profit Margin for Leonardo remained effectively unchanged, at 6.59%.
  • The Consensus Revenue Growth forecasts for Leonardo remained effectively unchanged, at 7.2% per annum.

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

About Leonardo
    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.
What are the underlying business or industry changes driving this perspective?
  • 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 Earnings and Revenue Growth

Leonardo Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?
  • 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

Leonardo Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?
  • 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

How have all the factors above been brought together to estimate a fair value?
  • 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.

How well do narratives help inform your perspective?

Disclaimer

AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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