Saab: A Great Company at the Wrong Price

Saab AB (publ), a Swedish defense and security giant, has emerged as a key beneficiary of global defense spending booms, particularly in Europe. The company’s first-quarter 2025 results highlighted robust operational performance, with double-digit sales and net income growth. Yet, its stock price reflects a premium valuation that may outpace near-term fundamentals. Let’s dissect whether Saab is a compelling investment at current levels.

Strengths: A Global Leader in Defense Innovation
Saab’s Q1 2025 performance underscored its strategic positioning. Sales rose 11% year-over-year to SEK 15.8 billion ($1.57 billion USD), driven by demand for its advanced systems, including the Gripen fighter jet, Stirling propulsion submarines, and cybersecurity solutions. Order intake surged to SEK 19.1 billion, with small and medium contracts fueling growth. Notably, the company’s EBITDA margin expanded to 13.6%, and net income jumped 65% to SEK 1.28 billion, signaling operational efficiency.

The company’s global footprint—operating in over 30 countries and supplying 100+ nations—provides diversification. CEO Micael Johansson emphasized Saab’s role in the European defense buildup, a trend likely to sustain demand for its products. A 15% annual revenue growth forecast over three years further supports its long-term potential.

Valuation Concerns: A Premium Price Tag
While Saab’s fundamentals are strong, its valuation metrics raise flags. As of Q1 2025, the stock traded at a P/E ratio of 54.68, meaning investors pay SEK 54.68 for every SEK 1 of earnings. This is well above historical averages and peers, such as Leonardo SpA (IT: LDO), which trades at a P/E of ~25. The price-to-sales ratio of 3.52 also suggests overvaluation, as the enterprise value-to-sales ratio hit 3.64, indicating investors are paying a premium for Saab’s sales growth.

Despite EPS growth of 64% in Q1, the stock dipped 3.2% post-earnings, underscoring market skepticism about whether the premium is justified. Analysts highlighted one unspecified warning sign, which could relate to execution risks in high-demand markets or geopolitical uncertainties.

Key Risk: Execution in a Competitive Landscape
Saab operates in a fiercely competitive aerospace and defense sector. While its 15% revenue growth forecast is ambitious, it trails the 16% industry average for Sweden’s Aerospace & Defense sector, signaling potential underperformance. The company’s reliance on government contracts also introduces political risk, as defense budgets can fluctuate with geopolitical tensions.

Upcoming Catalyst: Q2 2025 Results (July 18)
Saab’s Q2 results, set for release on July 18, 2025, will be pivotal. Analysts will scrutinize revenue trends, margin sustainability, and order backlog growth. A beat on both revenue and EPS could alleviate valuation concerns, while a miss might pressure the stock.

Conclusion: A Buy at the Right Price
Saab is undeniably a well-run, innovative company with strong tailwinds from defense modernization. Its Q1 results—11% sales growth, 65% net income expansion, and a 13.6% EBITDA margin—are impressive. However, the 54.68 P/E ratio and 3.52 P/S ratio suggest the stock is pricing in flawless execution and years of growth.

Investors should wait for a pullback or a Q2 beat to consider entry. At current levels, Saab’s valuation risks outpacing its near-term earnings potential. The July 18 earnings report will be a critical test: a strong showing could justify the premium, but a stumble might spark a correction. For now, Saab remains a great company at the wrong price—ideal for long-term investors with a high risk tolerance, but a cautionary tale for those seeking value.

Final Note: Monitor the July 18 results closely. Until then, proceed with caution.