Leonardo SpA: A Fortified Defense Play in Turbulent Times

The geopolitical landscape is shifting, and with it, the demand for advanced defense systems is soaring. Enter Leonardo SpA (LDO), an Italian aerospace and defense giant strategically positioned to capitalize on escalating global security concerns. With 83% of its revenue derived from defense contracts, Leonardo is a prime beneficiary of a structural tailwind: a multiyear defense spending boom driven by European nations playing catch-up after decades of underinvestment. Backed by a Morningstar 4-star rating, a 28% discount to its fair value, and a robust order backlog, Leonardo presents a compelling investment thesis for those seeking resilience in volatile markets.

The Geopolitical Catalyst: Defense Spending on Overdrive

European defense budgets have been languishing since the Cold War’s end, but recent geopolitical turbulence—from Russia’s invasion of Ukraine to China’s assertive posture—has sparked a renaissance. NATO members are now pledging to meet the 2% GDP defense spending target, with countries like Germany, Poland, and the UK ramping up procurement of advanced systems. This is Leonardo’s sweet spot.

The company’s portfolio spans helicopters, radar systems, cybersecurity solutions, and drones, all critical to modern defense architectures. Its flagship products, such as the Aermacchi M-346 jet trainer and Gabbiano surveillance drones, are in high demand. Consider this: Leonardo’s order backlog surged to €8.6 billion as of Q1 2025, a 10% year-over-year increase, fueled by contracts for infrared sensors, electric power systems, and tactical radars.

The data shows Leonardo’s revenue climbing steadily, with 13.5% growth in Q1 2025 year-on-year, underscoring the durability of its defense-centric model.

Morningstar’s Bullish Case: A 28% Discount to Fair Value

Morningstar’s analysis paints a clear picture: Leonardo is undervalued. Its fair value estimate of €42.40 (as of May 2025) sits 28% above its current stock price, reflecting the firm’s confidence in Leonardo’s moated business.

The moat? Geopolitical tailwinds + technical expertise + scale. Leonardo’s deep ties to European militaries and its role in major international projects (e.g., the Eurofighter Typhoon and F-35 Lightning II programs) create barriers to entry. Its narrow economic moat is further reinforced by $1.5 billion in annual free cash flow (projected by 2025) and a record backlog that ensures visibility for years.

Morningstar’s 4-star rating—a “strong buy” signal—adds credibility. The firm’s models account for scenario analysis, cash flow projections, and competitive advantages, all of which point to Leonardo’s ability to outperform peers in a risk-on environment.

The chart reveals a stark divergence: LDO’s shares have lagged behind its fair value, presenting a rare entry point.

Why Act Now? The Clock Is Ticking

The defense spending surge is not a short-lived fad. European nations are locked into multiyear modernization plans, and Leonardo’s exposure to long-term contracts (e.g., Germany’s €100 billion defense upgrade) ensures steady cash flows. Meanwhile, the stock’s valuation discount is a mispricing anomaly in the context of its fundamentals:

• Earnings momentum: Basic EPS rose to €1.87 in 2024, up from €1.14 in 2023.
• Balance sheet strength: Net debt/EBITDA improved to 1.2x (2024), signaling financial flexibility.
• Dividend discipline: A €0.09 quarterly dividend (yielding ~1.5%) adds a safety net.

Risks? Consider Them, But Don’t Overreact

Critics might cite supply chain bottlenecks or delays in government funding. Yet Leonardo’s diversified customer base (across 40+ countries) and $380 million in cash reserves mitigate single-point risks. Moreover, its 72% net earnings growth at subsidiary Leonardo DRS (Q1 2025) highlights operational resilience.

Conclusion: Buy Leonardo Before the Crowd Catches On

Leonardo SpA is a rare gem in today’s market: a company with a proven moat, structural growth drivers, and a substantial valuation gap. With geopolitical tensions fueling a defense boom and Morningstar’s imprimatur, now is the time to act.

The data tells the story: spending is accelerating, and Leonardo is positioned to capture it.

Invest now to secure a stake in a resilient, undervalued leader. The tailwinds are here—don’t miss the lift-off.

This analysis is based on publicly available data as of May 2025. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.