Five Stocks at the Core of NATO’s Drone & Defense Reset
Anchors, growth, and optionality: positioning across the next decade of defense innovation.
Global defense spending has shifted from cyclical to structural. NATO’s July 2025 summit locked in a 5% of GDP defense and security investment target by 2035. That mandate, combined with U.S. replenishment aid, European rearmament, and surging demand for counter-drone systems, creates one of the strongest multi-decade defense investment backdrops since the Cold War.
This post breaks down five companies that best capture this shift:
L3Harris (LHX) – the cash flow anchor
Kongsberg Gruppen (KOG.OL) – diversified European missile & maritime exposure
Hensoldt (HAG.DE) – Europe’s sensor leader
AeroVironment (AVAV) – high-growth U.S. drone pure play
DroneShield (DRO.AX / DRSHF) – speculative counter-UAS disruptor
Together, these names span the spectrum: from established primes with reliable free cash flow to small-cap disruptors priced for explosive growth.
Macro Tailwinds: Why Defense Spending Has Changed Permanently
NATO Reset: 5% GDP target effectively institutionalizes higher defense budgets through 2035.
U.S. Posture: Bipartisan support for missile defense, hypersonics, and space remains intact.
Europe: Germany raised its 2030 defense targets; Sweden, Poland, and other Eastern European states are accelerating procurement.
War Exposure: Ukraine continues to drive replenishment demand, loitering munitions, missile defense, and secure communications are top priorities.
Technology Shift: Counter-drone, AI-enabled ISR, and electronic warfare are now mission-critical.
In short: we’ve moved from cyclical budget debates to multi-decade structural demand.
Deep Dive: The Five Stocks
L3Harris Technologies (LHX)
Market Cap: ~$52–53B
Backlog: ~$35.4B
Financials: Q2’25 revenue ~$5.4B (+6% organic). Operating margin ~10–12%, net ~8%. Free cash flow guidance ~$3B FY26.
Segments: Space payloads, ISR systems, tactical radios, propulsion (Aerojet).
Valuation: EV/Sales 2.5–2.7×, EV/EBITDA ~15–16×, forward P/E ~25×.
Investment View: The most balanced exposure in the group. Scale + backlog visibility + FCF = a reliable core holding. U.S. dependence (76% sales) is a structural risk but mitigated by sticky programs.
Position: Core anchor.
Kongsberg Gruppen (KOG.OL)
Market Cap: ~NOK 276.6B (~USD 25–26B)
Backlog: NOK 134–139B
Financials: Q2’25 revenue +20–30% YoY. EBIT margin ~11–12%. Cash conversion mixed due to capex/WC build.
Segments: Missiles (Naval Strike Missile), maritime defense, autonomous systems.
Valuation: EV/Sales ~5×, EV/EBITDA ~28×. Premium vs peers.
Investment View: Strong order book, diversified customer base (NATO + maritime/energy). However, high multiples and weak cash discipline limit upside at current levels.
Position: European quality exposure; monitor for better entry.
Hensoldt (HAG.DE)
Market Cap: ~€11–12B
Backlog: ~€7B
Financials: H1’25 revenue €944M (+11% YoY). FY’25 guidance €2.5–2.6B. Book-to-bill ~1.2. 2030 revenue target raised to €6B.
Segments: Radars, electronic warfare, sensors, night vision, surveillance.
Valuation: EV/Sales ~5.1×, EV/EBITDA ~33–34×.
Investment View: The purest European sensor play. NATO radar/optronics demand creates durable growth. Near-term margin pressure from scaling and logistics, but long-term compounding story remains intact.
Position: European growth compounder.
AeroVironment (AVAV)
Market Cap: ~$11–12B
Backlog: ~$1.1B
Financials: FY25 revenue ~$821M; Q1 FY26 revenue $455M (+140% YoY). FY26 guidance $1.9–2.0B revenue. EBITDA trajectory ~$300–320M.
Segments: Small & medium UAS, loitering munitions, directed energy, BlueHalo acquisition synergies.
Valuation: EV/Sales ~11–12×, EV/EBITDA >100×. Analysts’ PT range: $267–335.
Investment View: Explosive revenue growth, but very U.S.-DoD dependent (~90%). Rich valuation means execution must be near-perfect. Volatile.
Position: High-beta speculative growth.
DroneShield (DRO.AX / DRSHF)
Market Cap: ~$2.6–2.9B
Financials: H1’25 revenue A$72.3M (+210% YoY); early 2H’25 already A$42.1M. Still EBITDA-negative.
Segments: Counter-UAS rifles (DroneGun), 360° detect/defeat systems (DroneSentry), AI-enabled wearable detection.
Valuation: EV/Sales ~24.5×. No EBITDA yet.
Investment View: Pure-play counter-drone. Government contracts growing fast, but profitability still distant. Valuation reflects flawless execution.
Position: Speculative option. Suitable for small sizing only.
Sector & Customer Concentration
U.S.-centric: L3Harris, AeroVironment (~80–90% DoD exposure).
Europe-diversified: Hensoldt (Germany/EU) and Kongsberg (broader NATO + maritime).
Hybrid: DroneShield (Australia + U.S. agencies).
War exposure (Ukraine, Eastern Europe) disproportionately benefits AVAV and LHX, while HAG and KOG get steadier multi-country procurement flows.
Investment Positioning
Core Portfolio Anchor: L3Harris (LHX)
European Growth Leverage: Hensoldt (HAG.DE)
Balanced European Stability: Kongsberg (KOG.OL)
High-Beta Growth: AeroVironment (AVAV)
Speculative Optionality: DroneShield (DRO.AX / DRSHF)
Bottom Line
Defense technology is no longer a backwater of cyclical budgets. NATO’s spending mandate ensures sustained demand for drones, sensors, missiles, and counter-UAS. The opportunity is not whether to invest but how to size exposure:
Anchor with cash flow-rich primes like LHX
Diversify into European sensor and missile leaders like HAG.DE and KOG.OL
Add measured allocations to high-beta disruptors AVAV and DRO for optionality
The 2025–2035 decade will belong to defense innovators. Investors who structure exposure now will be positioned for compounding upside through NATO’s reset.
This content is for informational purposes only and not investment advice.