European defence stocks could offer opportunity to investors without an aversion to profiting from the war industries.
U.S. President Donald Trump is responsible for this opportunity. His isolationist policies and decision to no longer carry three-quarters of the financial load for NATO defences have benefitted these stocks.
European defence spending has increased and is poised to really take off as other NATO members look to increase defence spending by $840 billion to three per cent of GDP from two per cent.
Six of the 30 members still spend less than two per cent — including Canada.
Last year non-United States members spent $430 billion US$ on defence.
Increasing that to three per cent over a few years would take spending to $645 billion — a boon for defence industries.
The three per cent target could easily become five per cent if Russia succeeds in trampling over Ukraine.
With the United States, NATO has 4.4 million in the military. Without the United States, Europe has 1.3 million military, comparable to Russia before the Ukraine invasion.
Eliminating all U.S. financial support would lead to $1.8 trillion in spending.
Some of the European defence stocks are listed in the United States as American Depository Receipts (ADRs). They trade in U.S. dollars, thus avoiding a second currency risk.
These companies sell products globally.
A devalued U.S. dollar makes exports cheaper and imports more expensive.
Finding employees for expansions becomes a concern unless these companies reduce global sales.
The ADR-listed defence stocks are BAE Systems, Rheinmetall, Thales, Dassault and Leonardo.
Even though annual revenues range from $6 billion to $20 billion US, none of them are eligible for RRSPs/RIFFs or TFSAs.
Most have seen spectacular stock gains since the invasion of Ukraine and in recent weeks with announcements of more defence spending. Investors may want to look for declines before firing the buy button.
These five companies are profitable with return on equity from 12.8 per cent to 24.1 per cent. Debt is low or reasonable.
Rheinmetall seems the best candidate. Germany has just approved a $535 billion increase in defence spending over five years.
Rheinmetall provides vehicle systems, land, sea and air defence, weapons and ammunition plus auto parts. Share price has jumped this year to $239US from $100. High was $241 just weeks ago.
BAE Systems of the United Kingdom operates in aerospace and military sectors. Current price of $82.10 US sits between the low $61 and $87 high.
France-based Thales Group provides aerospace and defence products globally, specializing in electronics and cybersecurity.
Share price of $264US is just under the year high of $275 and above the low at $137.
Another French company Dassault builds military jets, business jets and aerospace systems. Shares at $43.20 US are above the $22 low and the January $47.20 high.
Italian Leonardo builds helicopters, aircraft, aerospace gear and is heavy in electronics. Share price of $22.30 US is just under the $25 high, well above the $10.71 low.
The local re-armament of Europe does not bode well for U.S. defence stock fortunes.
CAUTION: Remember when investing, consult your adviser and do your homework before buying any security. Bizworld does not recommend investments.
Ron Walter can be reached at [email protected]
