By Cristina Gallardo

European defense groups are expected to post robust numbers in the fourth quarter as European governments continued to step up defense spending, including military support to Ukraine. However, the sector faces increased uncertainty in the months ahead.

Orders continued in the quarter, a period also marked by a ceasefire in the Israel-Hamas conflict, Donald Trump's return to the White House and his demands for an end to the Ukraine-Russia war. Meanwhile, some orders were put on hold amid political uncertainty in France and Germany, as well as a review of defense priorities in the U.K.

Here is what you need to know:

WHAT TO WATCH:

--DEMAND: British defense-technology company QinetiQ was among the first in the industry to warn of market headwinds in the U.S.

President Trump's demand to increase NATO's defense spending target to 5% of members' gross domestic product could boost budgets, leading to a jump in orders in the medium term.

But U.S. defense spending, and the extent of cost cutting by the newly-established Department of Government Efficiency, remain uncertain. This could affect the prospects of European defense companies reliant on the U.S., such as London-listed BAE Systems and QinetiQ.

"We think it is currently very hard for defense managements to convincingly forecast the domestic market beyond the next 12 months," Vertical Research Partners warned in a note to investors.

Trump's pressure to halt the Ukraine war could push down the price of shares in European defense companies heavily involved in the supply of armaments to Ukraine, notably Rheinmetall, which is sending almost all of its ammunition production to the war-torn country. But opportunities would remain even after a ceasefire, as Kyiv would want to re-equip and continue to improve its military, JPMorgan analyst David Perry said in a note to investors.

--ORDER INTAKE: Rheinmetall's 2024 order target of between 30 billion euros and 40 billion euros ($31.03 billion to $41.38 billion) was held up by a month, with the approval of several large orders from Germany delayed to the end of January, Deutsche Bank's analyst Christoph Laskawi said in a note to investors. The German election later this month is likely to postpone orders from the country for a couple of months, he added.

In its fourth-quarter, Rheinmetall booked additional order for ammunition and Marder infantry fighting vehicles for Ukraine. Meanwhile, Italy placed an order for its Skynex air-defense system, with an option to acquire up to four systems worth a total 280 million euros.

Analysts expect BAE Systems, Europe's other industry heavyweight, to post robust orders, and a book-to-bill ratio above 1 for the year. December was a big month for the U.K. company, which secured a 133 million-pound contract from the four-nation Eurofighter consortium to further develop its Striker II Helmet Mounted-Display.

Saab--a Swedish manufacturer of military equipment ranging from ground combat weapons and missile systems to fighter jets and submarines--said it expects fourth-quarter sales to be around 20.9 billion Swedish kronor ($1.89 billion) with organic sales growth of 29.3%.

French aerospace and defense groups Thales and Safran are widely expected to get a financial boost from a couple of large Indian orders for 26 Rafale Marine aircrafts and three Scorpene submarines, Jefferies analysts Chloe Lemarie and Ben Brown said.

Indian Prime Minister Narendra Modi is expected to sign the long-awaited contracts during a visit to France on Feb. 10. This should be a significant order intake for Thales, a supplier to both programs and owner of a 35% stake in Naval Group, which manufactures the Scorpene, the analysts noted.

--GUIDANCE: BAE Systems and Germany's RENK Group upgraded their sales guidance in August, reflecting the step-up in military procurement from governments. QinetiQ confirmed its fiscal 2025 and mid-term outlook in January.

Thales reiterated the positive momentum of its defense division in a pre-close call last month, but warned that political uncertainty in France could cause delays in contract notifications this year due to budget approval timelines.

Leonardo is expected to provide 2025 guidance and outlook commentary on its Aerostructures division, which posted an adjusted EBIT loss of 53 million euros in the third quarter, ahead of a strategy update on March 11.

Saab said in mid-January that it expects 2024 sales growth to beat company guidance as it experienced a stronger-than-expected final quarter of the year. It forecasts full-year sales of around 63.8 billion Swedish kronor with organic sales growth of 23.4%. It had previously guided for organic sales growth at the upper end of a 15%-20% range.

--SHARE BUYBACKS: Several companies with strong cash flow--such as Airbus, Rolls-Royce, Thales and Leonardo--could launch share buyback programs this year, joining the likes of BAE Systems, Melrose and QinetiQ, which have schemes running, Perry of JPMorgan said.

WHEN COMPANIES ARE SCHEDULED TO REPORT:

-- Kongsberg: Feb. 7

-- Saab: Feb. 7

-- Babcock International: Feb. 11

-- BAE Systems: Feb. 19

-- Leonardo: Feb. 20

-- Hensoldt: Feb. 27

-- Thales: March 4

-- Dassault Aviation: March 5

-- Melrose Industries: March 6

-- Rheinmetall: March 12

-- RENK Group: March 26

Write to Cristina Gallardo at cristina.gallardo@wsj.com

(END) Dow Jones Newswires

February 04, 2025 04:58 ET (09:58 GMT)

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