What’s the Idea?
Leonardo stands at the forefront of the European defense super-cycle. As NATO nations accelerate military modernization, Leonardo is evolving from a traditional manufacturer into a high-tech electronics and cybersecurity powerhouse, positioned to capture a massive share of the EU’s rearmament budget.
1. Strategic Rearmament Pivot
The geopolitical landscape has forced the EU into a period of active military modernization. Leonardo is a direct beneficiary, providing everything from advanced helicopters to critical electronic systems for modern warfare. This favorable environment is backed by long-term state-level commitments across the region.
2. High-Tech Alliances
Leonardo’s growth is amplified by its partnerships. Through joint ventures with Rheinmetall and BAE Systems, and a promising cooperation with Baykar in drone production, Leonardo is securing its role as a key electronics supplier for the next generation of military hardware.
3. Operational Acceleration
Early 2025 results show a significant surge in orders and a strong revenue trajectory. With a cost-optimization program running ahead of schedule, Leonardo is well-positioned for a guidance upgrade, as the current full-year forecast has yet to fully account for this momentum.
4. Future Segments
Beyond traditional aviation, Leonardo is expanding into Space and Cybersecurity. These high-margin, promising sectors leverage the company’s decades of defense expertise to create a more diversified and tech-centric revenue profile.
The Investment Thesis
The core trigger for the 23.7% upside is the combination of a record order backlog and improving operational margins. As Leonardo demonstrates its ability to scale high-tech production while cutting costs, we expect a valuation re-rating toward our $60 target. The market is currently underestimating the speed of the company’s industrial transformation.
About Leonardo ($LDO)
Leonardo S.p.A. is a global leader in aerospace, defense, and security, headquartered in Rome. Since its founding in 1948, the company has evolved into a cornerstone of European strategic autonomy, providing critical technology for military and civilian applications worldwide.
Key Business Segments
Leonardo’s diversified portfolio is designed to meet the complex demands of modern warfare and aerospace innovation:
- Defense Electronics & Security: The company’s largest division, specializing in advanced sensors, tactical communication systems, and integrated control systems for land, sea, and air.
- Helicopters & Aircraft: A world-class manufacturer of military and civilian helicopters (AW series) and fixed-wing aircraft, including key structural components for global aerospace programs.
- Cybersecurity & Space: High-growth divisions focusing on digital infrastructure protection, space optics, and sensor technology—critical for the next generation of satellite and intelligence systems.
Strategic Industrial Footprint
Operating as a key partner in major international defense programs, Leonardo balances its traditional manufacturing roots with a rapid pivot toward digitalization. The company’s ability to integrate electronic hardware with sophisticated software has made it an indispensable supplier for NATO-led initiatives and joint ventures with global defense giants like BAE Systems and Rheinmetall.
Reason 1: Unmatched Diversification in the Defense Super-Cycle
Leonardo’s strength lies in its balanced industrial architecture. With six distinct segments, the company captures value across the entire defense and aerospace spectrum—from tactical electronics to next-gen fighter jets and space infrastructure.
Defense Electronics (DE&S)
43.7% of Revenue | 13.1% EBITA Margin
The “brain” of the company. Provides sensors, C2 systems, and UAV countermeasures. Segment growth is fueled by a projected 3.2% global defense CAGR through 2033.
Aviation & Fighters
16.1% of Revenue | 14.6% EBITA Margin
A high-growth driver. With Eurofighter orders exceeding 700 units and a central role in the F-35 program, new orders surged 47.7% YoY in early 2025.
Helicopters
29.6% of Revenue | 8.9% EBITA Margin
Leonardo is a global leader in multi-purpose rotors. While the market grows at 3%, Leonardo’s segment achieved an 11.1% CAGR in 2024, outperforming peers.
Emerging High-Margin Verticals
Beyond its core divisions, Leonardo is successfully incubating “future-proof” segments that diversify its earnings and reduce exposure to any single program:
- Space (89.2% Growth in Q1 2025): A strategic powerhouse in satellite optics and atomic clocks. Demand for space security is driving a 5.4% 10-year CAGR.
- Cybersecurity (11.7% Projected CAGR): Applying defense expertise to protect critical infrastructure via AI-driven monitoring and threat response.
- Aerostructures Recovery: Currently under pressure (-20.2% margin) due to supply chain issues at Boeing/Airbus, but on a clear path to EBITA breakeven by 2028 as global production normalizes.
The Takeaway: Leonardo’s 11.1% organic revenue growth in 2024 proves its model works. By combining stable cash cows like electronics and helicopters with high-growth bets in space and cyber, the company offers a robust profile for the 2026 defense landscape.
Reason 2: The European Rearmament Super-Cycle
Leonardo is a primary beneficiary of Europe’s strategic pivot toward military autonomy. With 72% of its revenue tied to defense and 81% coming from government contracts, the company is perfectly positioned to capture the historic surge in NATO defense budgets.
Strategic Tailwinds: NATO & EU Initiatives
Two major catalysts are reshaping Leonardo’s addressable market in 2026:
- The 5% GDP Target: Following the 2025 Hague Summit, NATO allies have committed to a 5% GDP defense spending goal by 2035. This represents a paradigm shift from the previous 2% floor, creating a permanent high-demand environment.
- EU Readiness 2030: This initiative provides a €150 billion credit facility and a legal framework to fast-track defense procurement, favoring regional suppliers like Leonardo over non-EU competitors.
Key Market Dynamics
Italy: The Core Engine
Italy’s defense budget is projected to jump 12.5% to €36 billion in 2025. As the national champion, Leonardo addresses roughly 39% of this budget, benefiting from Italy’s push to exempt military spending from EU deficit rules.
UK: Steady Expansion
The UK (12% of revenue) is raising defense spending to 2.5% of GDP by 2027. The British defense budget is growing at a ~5% CAGR, securing Leonardo’s long-term electronics and helicopter contracts.
The Franco-German Opportunity
With France targeting €67.5B by 2030 and Germany exempting military spend from its “debt brake,” intra-European joint ventures offer Leonardo a 5x growth potential in equipment supply by 2030.
Long-Term Growth Visibility
Management’s forecasts of a 4.5% CAGR for European defense and 8.8% for cybersecurity now appear conservative, as they were issued before the adoption of the 5% GDP target. As EU nations move to scale their production capacities, ING estimates that spending on intra-EU equipment could grow fivefold by 2030. For Leonardo, this translates into a decade of high-visibility revenue and a strong margin of safety for our 23.7% upside case.
Reason 3: Strategic Alliances and Digital Transformation
Leonardo is no longer just a hardware manufacturer; it is transforming into a high-tech ecosystem leader. Through its updated 2025–2029 Industrial Plan, the company is leveraging massive digitalization and global partnerships to unlock over €2.4 billion in additional revenue by 2029.
Industrial Plan 2029: The Efficiency Engine
The 2025 Industrial Plan sets aggressive targets driven by a €1.8 billion gross saving program, which is already running ahead of schedule:
- Profitability Leap: EBITA is projected to grow at a 13.3% CAGR, with margins expanding to 10.68% by 2029 (up from 8.58% in 2024).
- Cash Flow Double: Free Operating Cash Flow (FOCF) is expected to nearly double to €1.53 billion, providing ample room for debt reduction and increased shareholder payouts (90% dividend hike in 2025).
- Aerostructures Recovery: A clear roadmap to reach EBITA breakeven by 2028 through supply chain restructuring and operational efficiency.
Game-Changing Partnerships
Rheinmetall Joint Venture
A 50/50 partnership to build next-gen tanks and Lynx IFVs for the Italian Army. Expected revenue contribution: €1.0 billion by 2029, with a total project value of ~€23 billion through 2040.
Baykar Drone Alliance
Leonardo is integrating its advanced sensors and electronic warfare systems into Turkish Baykar drones. This JV targets €600 million in cumulative revenue through 2029.
GCAP (6th Gen Fighter)
Partnering with BAE Systems and Mitsubishi to develop the Tempest. Leonardo leads the digital brain (AI and sensors) for a program delivering 350+ aircraft by 2035.
Digital Edge: The Leonardo Hypercomputing Continuum (LHyC) initiative is set to contribute €230 million by 2029, using AI and supercomputing to optimize everything from satellite data analysis to predictive maintenance, solidifying Leonardo’s role as a tech-first defense major.
Reason 4: Record Backlog and Resilience to Trade Volatility
Leonardo’s financial foundation is reinforced by a massive order book and a business model largely shielded from global trade tensions. With a backlog providing over 2.5 years of revenue visibility, the company is enterring 2026 with high predictability.
Order Book Momentum
The Q1 2025 results highlighted an exceptional surge in demand:
- Record Backlog: €46.18 billion (approx. 2.53 years of revenue).
- New Order Growth: Increased 19.7% YoY in early 2025.
- Organic Strength: Growth remained robust even after exiting the Underwater Armaments (UAS) business.
2025–2026 Cautious Guidance
Management maintains a conservative outlook, leaving room for positive surprises:
- Revenue: Targeted at €18.6B (+4.7% YoY).
- FOCF: Expected at €870M, growing faster than revenue.
- Debt Reduction: Net debt falling to €1.6B, even after a 90% dividend increase and M&A allocations.
Minimal Tariff Exposure
In an era of rising trade barriers, Leonardo stands out as a “geopolitically safe” asset. The nature of its contracts and its localized manufacturing footprint mitigate the risks of international duty conflicts:
- Government Immunity: Most shipments are for sovereign defense contracts, which are traditionally exempt from customs duties.
- Low U.S. Risk: Management estimates that only 1.3% of total revenue (mostly civilian helicopters) is subject to potential U.S. tariff risks.
- Operational Flexibility: Risks are further offset by localized production and the ability to adjust contract terms with long-term government partners.
Key Insight: The gap between current performance (+13.5% revenue growth in Q1) and management’s conservative 4.7% annual target suggests a high probability of guidance upgrades in H2 2025/early 2026, which would serve as a major catalyst for the stock.
Financial Performance: Stable Foundations & Cash Flow Growth
Leonardo’s financial results through Q1 2025 demonstrate a business in transition—shifting from steady maintenance to rapid acceleration. While headline margins remain stable, the underlying cash flow generation and debt management point to significant fundamental strengthening.
Cash Flow & Debt Dynamics
Leonardo’s financial strategy is centered on deleveraging while maintaining aggressive investment in high-tech segments. The unique structure of its debt and cash flow provides a hidden margin of safety:
- Improving Net Income: Excluding non-recurring gains from portfolio sales (like UAS and Telespazio), core net income surged by 23.7% in Q1 2025, reflecting better underlying unit economics.
- Manageable Debt: While total debt stands at €4.21 billion, a significant portion (€1.76B) consists of flexible intra-affiliate loans. Only €673M in bank/bond debt is current, which is fully covered by €1.87B in cash on hand.
- Rating Momentum: S&P, Moody’s, and Fitch have all noted the positive deleveraging trend, with Fitch highlighting a likely rating upgrade in 2025 as bonds mature.
Financial Verdict: Leonardo’s profitability is currently modest, but its cash flow generation is robust and growing faster than its capital expenditure. This creates a healthy “flywheel” effect: stronger FOCF allows for debt reduction and dividend growth, which in turn lowers interest costs and supports a higher valuation multiple.
Stock Valuation & Upside Potential
Leonardo is currently valued at a significant discount compared to its European defense peers. While the market has priced in its historical complexity, it has yet to fully account for the company’s rapid deleveraging and the structural shift in European defense spending.
The Convergence Play
We expect the valuation gap to close over the next 12 months, driven by two primary catalysts:
- Deleveraging: The scheduled repayment of the €500 million bond in 2025 and the overall reduction of the debt burden will de-risk the balance sheet, leading to a multiple re-rating.
- Margin Expansion: As the efficiency program takes hold, EBITDA margins are expected to climb toward the 10.7% target, aligning Leonardo more closely with industry leaders.
- Analyst Momentum: Leonardo remains a rare “buy” in the sector where upside still exists. The median target of $60 (23.7% upside) reflects recent upward revisions following record order announcements.
Key Investment Risks
Complex JV Structure
Significant revenue (~€3.0B) sits in non-consolidated joint ventures. This often obscures the true scale of growth, potentially delaying the market’s reaction to positive results.
Liquidity & JV Obligations
Meeting cash obligations toward JVs could temporarily pressure liquidity and slow down the expected deleveraging process if not managed with precision.
Government Budget Shifts
With 80% of revenue coming from governments, any unexpected shift in national priorities or fiscal constraints could impact the pace of order fulfillment.
The Takeaway: Leonardo offers a rare combination of “value” and “growth” in the defense space. As the company cleans up its balance sheet and proves its margin expansion story, we expect the 20% valuation discount to evaporate, propelling the stock toward our $60 target. Current entry levels represent a high-conviction opportunity in the European security landscape.