The aerospace and defence complex enters 2026 with a favorable demand backdrop, underpinned by clear multi-year defence budget commitments across a number of markets and improving visibility in commercial aviation. Kepler Cheuvreux's recent analysis cautions that, even after a marked rally that has pushed valuations higher, a handful of companies preserve compelling investment attributes.
The research note emphasizes that supply bottlenecks, the ability to execute on programs, and consistent margin delivery will determine which firms outpace peers. Against that framework, Kepler highlights five European groups that stand out for their market positions, operational changes, or valuation characteristics.
Safran SA (EPA:SAF)
Safran is presented as Kepler's top pick for high returns in the sector. The brokerage points to Safran's commanding role in the global narrowbody market - where it controls more than 75% market share - as the foundation for durable margins and predictable cash flow growth. That dominant footprint in commercial aviation is cited as a key stabilizer and growth driver for the company's earnings profile.
Rheinmetall AG (ETR:RHMG)
Rheinmetall is described as well positioned to benefit from Germany's sizeable stimulus measures and the broader NATO push to upgrade capabilities. Kepler notes the company's strong recent performance but also flags some volatility tied to its growth reliance on the high-margin ammunition business. As European defence spending expands, Rheinmetall is identified as a significant regional beneficiary.
Leonardo SpA (BIT:LDOF)
Leonardo's recent portfolio reshaping is highlighted as having narrowed the group's focus toward higher-return activities. Strategic joint ventures and asset reorganizations are credited with concentrating the business on assets that generate improved returns, thereby strengthening Leonardo's competitive footing in core defence markets.
Indra (BME:IDR)
Kepler characterizes Indra as having evolved into Spain's leading defence contractor, a transformation that has materially improved shareholder returns. The report also points to potential upside from a possible merger with EM&E, which could enhance Indra's market position and its capabilities in defence electronics if the transaction materializes.
Exail Technologies (EPA:EXA)
Exail is singled out for its attractive valuation relative to the potential in the autonomous underwater defence niche. Kepler identifies Exail as the dominant player in this specialized segment and suggests the company is well placed to gain from rising naval defence allocations as underwater capabilities take on greater importance.
Overall, Kepler's selections reflect a mix of structural market leadership, targeted portfolio improvement, and valuation opportunity within specific subsegments of aerospace and defence. The firm underscores that, while the sector-wide backdrop is supportive, company-specific execution and exposure to constrained supply chains will separate winners from laggards.
Implications
- Defence spending trajectories and commercial aviation recovery are central to earnings visibility across the sector.
- Companies with strong market share or focused portfolios may convert sector tailwinds into superior cash flow and returns.
- Exposure to specialised defence segments - for example ammunition or autonomous underwater systems - can amplify both upside and volatility.