European Policy And New Export Markets Will Stimulate Defense Demand

Key Takeaways

• Strong defense spending trends and local sourcing requirements in Europe support long-term growth, with record-high order intake reflecting robust demand and future earnings potential.
  
• Strategic export market expansion, a focus on advanced digital solutions, and increased financial flexibility position W5 Solutions for sustained topline growth and margin improvement.
  
• Persistent profitability challenges, reliance on major contracts, integration risks from acquisitions, regulatory barriers to exports, and weak Power segment performance threaten long-term growth and stability.

Catalysts

Manufactures and supplies systems and solutions for the defense and civil security sectors in Sweden.

• Recent policy decisions in Europe-including increased NATO and EU member defense spending targets with a requirement for local technology sourcing-point to sustained and growing demand for advanced defense products and services, directly supporting long-term revenue growth and contract opportunities for W5 Solutions.
  
• Robust, record-high order intake (+211% YoY) and a book-to-bill ratio well above 3 indicate an accelerating demand environment driven by heightened geopolitical tensions and increased investments in military readiness, suggesting significant topline expansion and future earnings leverage as the company executes its backlog.
  
• W5 Solutions' entry into new export markets (notably Finland and the UK), evidenced by high-value, strategically important contracts, diversifies revenue streams and reduces home market dependency, laying the groundwork for continued topline growth and improved profitability as scale increases.
  
• The company's focus on digital-driven and simulation-based solutions-aligned with global defense modernization trends toward AI, sensor fusion, and networked training platforms-positions W5 Solutions to benefit from higher-margin, technology-intensive contracts and longer product lifecycles, supporting margin expansion.
  
• The recent successful capital raise enhances financial flexibility for strategic M&A and organic expansion, enabling W5 Solutions to accelerate growth, gain operational leverage, and bolster future earnings through acquisitions and scaling of operations.

W5 Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming W5 Solutions's revenue will grow by 23.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -6.0% today to 10.0% in 3 years time.
• Analysts expect earnings to reach SEK 74.7 million (and earnings per share of SEK 2.56) by about September 2028, up from SEK -23.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.2x on those 2028 earnings, up from -45.0x today. This future PE is lower than the current PE for the SE Aerospace & Defense industry at 53.4x.
• Analysts expect the number of shares outstanding to grow by 5.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.85%, as per the Simply Wall St company report.

W5 Solutions Future Earnings Per Share Growth

Risks

• The company is experiencing ongoing profitability challenges, with negative EBIT margins persisting despite strong sales growth; if top-line growth slows or fails to convert into sustainable profitability, long-term net margins and earnings could be at risk.
  
• W5 Solutions is heavily reliant on a small number of large defense contracts, many of which are subject to long lead times and uncertain renewal or expansion, making revenues vulnerable to contract loss, delays, or shifting government procurement priorities.
  
• The long-term growth strategy depends in part on acquisitions (M&A), which carries integration risk, potential cost overruns, and possible impairment charges-any of which could negatively affect future earnings and return on invested capital.
  
• Export-driven growth and international expansion may be limited by changing regulatory frameworks, heightened export controls, or shifting political priorities, which could restrict access to key global markets, thereby constraining long-term revenue diversification.
  
• Profitability in the Power segment remains weak and has yet to reach sustainable levels, and ongoing investment will likely be needed to maintain competitiveness amid rapid technological changes in defense energy and simulation markets, pressuring margins and cash flow if not managed prudently.

Valuation

• The analysts have a consensus price target of SEK79.5 for W5 Solutions 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 SEK88.5, and the most bearish reporting a price target of just SEK75.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK746.0 million, earnings will come to SEK74.7 million, and it would be trading on a PE ratio of 25.2x, assuming you use a discount rate of 5.9%.
• Given the current share price of SEK60.4, the analyst price target of SEK79.5 is 24.0% higher.
• 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.