Investors are shifting focus from traditional defense stocks to cheaper industrial companies expected to benefit from increased military spending in Europe. Thyssenkrupp's shares surged 20% fueled by the anticipated defense budget boost and potential growth in its warship division. Despite a 40% value decline over five years due to restructuring, the conglomerate's defense assets are now viewed as growth catalysts, making it a "hidden" defense stock. As the market recognizes undervalued defense assets, share prices may rise driven by higher valuation multiples and earnings tied to elevated defense outlays.
Analysts point to opportunities in companies like Iveco Group and shipbuilder Fincantieri in the potential expansion of the defense rally. Active stock selection will be crucial for investors as these opportunities may not align with passive strategies. Additionally, industrial companies not directly involved in defense could also reap benefits from the military upturn.
Iveco's shares have surged recently, with a notable 10% operating profit margin last year, showcasing their growth potential. Following market trends since Russia's invasion of Ukraine, Thyssenkrupp and Iveco have shown significant growth this year, outperforming the aerospace and defense index. While global defense companies trade at higher earnings multiples compared to three years ago, both Iveco and Thyssenkrupp are currently valued around 8 times based on expected earnings.