European defence stocks have lost a little of their lustre after a blistering start to the year following a disappointing IPO aftermarket for Amsterdam-listed ammunition manufacturer CSG and a derating in listed defence firms, notable Germany’s Rheinmetall.

However, that derating, after what many had seen as an unsustainable stock run, allows fundamentally focused investors to get capital to work in a sector that remains structurally invaluable to Europe in the years ahead.

For ECM investors looking at the IPO of Franco-German tank maker KNDS, or an effective re-IPO of satellite and space-tech business OHB, partially backed by KKR, there is likely to be far more value on the table.

European defence stocks began the year on a high, with Rheinmetall trading at multiples equivalent to US AI leaders and investors pouring into the books of any equity capital markets transaction linked to the sector.

This has cooled in recent months.

After outperforming the benchmark Stoxx 600, and even mega-cap US tech stocks since the beginning of the war in Ukraine in 2022, Europe’s listed defence names have lost a little altitude from stratospheric highs over the last 12 months.

The Stoxx Europe Total Market Aerospace & Defense index has fallen 6% YTD.

Germany’s Rheinmetall, somewhat of a universal proxy for European rearmament, has fallen around 38% since the end of January as of 11 May 2026.

It remains 90% higher than at the start of 2025 levels and over 1,000% above pre-Ukraine war levels.

Rheinmetall’s missed revenue estimates in 1Q due to slower than expected deliveries, although this was somewhat mitigated by a EUR 73bn order backlog and strong guidance for the rest of the year.

But the revenue miss caused analysts at JP Morgan to downgrade the stock to neutral and set a new price target of EUR 1,500 a share. Jefferies and Bernstein Research remain more positive with price targets of EUR 2,220 target, and EUR 2,050 alongside buy ratings.

In response, Rheinmetall’s share price fell almost 10%, to EUR 1,218 as of close of 8 May. At the more bearish JPM target, that is still an upside of around 19%, if Jefferies or Bernstein are correct in their assessment it represents potential growth of well over 40% for the stock over 12 months.

The fall in the price combined with strong guidance and a huge order backlog potentially supports a new entry point for investors keen to play the longer-term sectoral trend versus the early year hype.

And that longer-term investment thesis is vital.

Europe’s need to spend more on its own security has become even more of an imperative since the outbreak of the war in the Middle East, which has sucked US resources away from the frontlines in Ukraine to the Persian Gulf.

It seem also to have severed any remaining goodwill between US President Donald Trump and leaders of key NATO allies.

A recent spat with German Chancellor Friedrich Merz has led to the US pulling troops out of Germany and successive fallouts with UK Prime Minister Keir Starmer seem to be pushing America’s closest traditional ally back into the bosom of Europe, regardless of whether the beleaguered premier remains in post or is soon replaced.

A little less hype, a little more fundamentals

A cooling of listed European defence stocks plus this longer-term strategic need is a boon for long-term investors and, potentially, ECM deals.

With KNDS likely to come at a significant discount to Rheinmetall, given traditional IPO market concessions, it should prove a strong buy for long-only capital.

KNDS is on the road meeting with investors for a possible pre-summer listing and the word from those meetings is that far from damaging the business case for the Franco-German tank maker, the sector derating has re-focused discussions on core fundamentals, rather than frothy hype.

While there are still issues over KNDS’s ultimate shareholder structure and the respective equity holdings of France and Germany, the deal is likely to be popular when it finally hits the road.

“The KNDS IPO feels like a far healthier setup than the defence businesses we saw earlier this year,” noted one investor. “People who will take part are the ones who really like the asset and business story rather than those getting swept up in any hype.

“It’s mostly tanks, there isn’t anything crazy about this business, this isn’t Palantir – it’s a good industrial supplier to military programmes in Germany and France that wants to be listed. If they are sensible on the valuation, this deal should get done.”

Based on the share price close on 8 May, Rheinmetall has a price/sales ratio of 5.72x for 2025, according to Fidessa.

Rheinmetall’s CAGR for 2023-2025 revenue is 17.7%. However, given the huge spurt in defence spending, the 2026 revenue estimate is EUR 14.25bn compared to EUR 9.93 bn in 2025, a growth of 43.4%.

KNDS recorded revenues of EUR 3.2bn in 2022, EUR 3.3bn in 2023, and EUR 3.8bn in 2024. The revenue CAGR for the three years is 8.9%, meaning the 2025 revenue expectation, which will be announced this month before the IPO, would sit in a range of EUR 4.1bn-EUR 4.2bn, based on the CAGR. Assuming a similar jump of 15% to that seen between 2024 and 2023, the estimate for 2025 revenue would be around EUR 4.37bn.

A 15% jump would value KNDS at around EUR 25bn, based on Rheinmetall’s equivalent P/S multiple.

At a recently reported target market capitalisation of EUR 18bn, the IPO would be coming at a healthy discount of 28% to Rheinmetall’s 2025 multiple. If KNDS outperforms in 2025 given the increased defence spending reported by Rheinmetall, that valuation would be even more generous.

While KNDS’s listing has all the features of a high class, high-margin, industrial, there is also one to watch for growth investors.

German satellite business OHB’s much anticipated share sale plays to a higher growth, tech-orientated investor base than KNDS, given its positioning in the space-tech sector.

“Obviously there will be questions among some investors whether defence has run its course,” noted an ECM banker. “We don’t think it has, but it has matured into a more bifurcated market, on one hand you have the heavy industrial wing of the industry, and on the other the high growth space tech, satellite and drone businesses that play to a different investor base.”

IPO appetite dented by CSG

However, there is the cautionary tale of CSG’s aftermarket trading following its blockbuster IPO in January.

The Czech arms manufacturer listed in Amsterdam in a EUR 3.8bn IPO. It is now down 35% from its offer price.

While there has been some talk that CSG may have been too expensive, despite investors being relatively happy with the price at the time, the major issues around the business relate to a host of idiosyncrasies and controversies that have hit its share price in the aftermarket.

Other defence listings have recovered, notably German defence and security power system Vincorion, which is now trading around 20% above offer price, after briefly falling underwater.

A banker on the deal, speaking last month to ECM Pulse when Vincorion was underwater, had been befuddled by the performance but predicted the stock would recover once it had delivered its first set of listed results.

Vincorion reported a 40% increase in revenue at its 1Q results last week, its strongest first quarter on record, immediately rewarding those who had faith in the IPO.

“Sometimes it seems investors won’t make a commitment to support, fully support an IPO until those first set of numbers, it’s a dynamic we are seeing more and more, but once you get through, those things become far easier.”

Far from the bubble-like trading of early 2026, European defence investment now looks far more sustainable.