欧洲防务：战争还是和平，预算说明了什么

European Defense: War or peace - What budgets are saying 2026 brought more wars and political instability, but Global Defense stocks recently sold off.Yet, we don’t see valuations as particularly attractive overall, nor see a clear catalyst to triggera recovery. Hence, we continue to favor self-help stories: Leonardo, Thales and Rheinmetall. Adrien Rabier+44 20 7676 6820adrien.rabier@bernsteinsg.com Deal or no deal. Putin’s weakened position revived hopes of a cease-fire. And Ukraine’srecent military performance plus media reports of eroding local support for Putin’s warmake the discussions more credible. But, we have seen similar hopes in the past. Theincentives for Putin to keep fighting and the number of negotiating points still make adeal difficult to reach, in our view. If there was a sustainable cease-fire, we would expectEuropean stocks to de-rate sharply, as it would lead to concerns over the sustainability ofthe re-arming cycle and remove the key catalyst for the sector: an active conflict in Europe. Douglas S. Harned, Ph.D.+1 917 344 8430douglas.harned@bernsteinsg.com Cyriaque Blanchet+44 20 7676 7342cyriaque.blanchet@bernsteinsg.com Specialist Sales European Defense still isn’t cheap.Prior to the sell off that started in Q2’26, stocks weretrading at peak valuations. And valuations are just below where they were at the start of theyear (currently 12.9x EV/EBITDA vs. 13.6x at the beginning of 2026). We do not see theselevels as a no-brainer. Nor do we see a clear catalyst to trigger the recovery. James Brady+44 20 7762 5272james.brady@bernsteinsg.com The truth lies in the budgets.In a challenging environment for European Defense, webelieve the key driver of long-term performance remains military budgets growth. We lookfor fundamental reassurance in the key geographies (US, Germany, France). We believe there-arming cycle will continue until the end of the decade, even if there is durable peace inUkraine. Therefore we believe stocks can still work. United States.We do not expect the $1.5tn budget to make it through Congress. But,even if only the “base” 2027 budget was approved, it would imply strong growth ($1.1tnvs. $0.9tn in 2026, +22%). In our European coverageBAE Systems(45% of sales) andLeonardo(25% of sales) are most exposed to the US and should strongly benefit. Even ifthey are not most exposed to the key segments (missiles, air defense systems, space). Germanyremains the best market in Europe. We model a +21% CAGR for the opportunity,captured by local champions and US/Israeli exporters. German players with exposure toammunition, land vehicles and naval should benefit most.Rheinmetallis in the sweet spot. France’ s addressable market should grow at an +8% CAGR until 2030.ThalesandDassault Aviationshould continue to capture a large share of the opportunity, given thefocus on aircraft, space, ammunition and air defense. We like three stocks, for three different reasons.Leonardohas the most room for earningsupgrades, in our view. We see the recent CEO change dip as an entry point. ForThales,we believe our tactical upgrade will start playing out in Q2’26. We see the set-up (lowerexpectations in Cyber paired with continued strength in the core business) as attractive.Rheinmetallis in a league of its own when it comes to growth (+29% sales CAGR until2030 vs. peers +10%). The stock is in the penalty box because of short-term volatility but,at these levels, we see an attractive risk-reward into Q2’26.BAE SystemsandDassaultAviationare the most resilient but we struggle to see a catalyst for short-term upgrades.We expectTKMSto win a mega order in Canada but see the stock as fairly valued. BERNSTEIN TICKER TABLE INVESTMENT IMPLICATIONS We rate Leonardo, Thales and Rheinmetall Outperform. We rate TKMS, Dasault Aviation and BAE Systems Market-Perform. DETAILS EXHIBIT 1:European Defense stocks have been weak since Q2’26... We believe long-term performance for European Defense stocks will be driven by the geographical and segment exposure. Welook for fundamental reassurance on the prospects, across key geographies. UNITED STATES US stocks down despite the environment.The broad sector rotation out of Global A&D has impacted US defense primestoo. Prior to the start of the Iran war, defense stocks were near peak historical valuations. While we see the fundamentals assolid for defense, it appears to have become less attractive at these levels when investors are seeking higher top line growthopportunities. We do not see any significant issues with specific US defense stocks. But, we also do not see a near-term catalystthat will take these stocks higher, despite the lower valuations. A strong 2027 budget.The 2027 budget proposal of $1.45tn, combining discretionary appropriations and reconciliationfunding, is a record increase. We do not expect such a budget to make it through Congress, although we do expect upside. Thisview is consistent with perspectives we heard from defense CEOs at our Str