European defence equities have retreated roughly 11% from their 2026 highs even as analysts have lifted profit expectations for the sector, according to a Barclays research note published Wednesday. The bank warns that the first quarter traditionally brings limited relief because it is seasonally weak and tends to produce negative free cash flow for many industry participants.
Barclays points out that, despite the pullback from peak levels, the defence sector has still outperformed the STOXX Europe 600 index so far this year. Defence stocks are up about 16% year-to-date compared with a 4% rise for the broader benchmark. Consensus earnings estimates for the defence sector have been revised upward by roughly 7-9%, versus a 4-5% upgrade for the wider market, Barclays Research says.
Barclays on Q1 dynamics
"1Q is seasonally weak, so we expect little surprises," Barclays analysts wrote, noting that the quarter is typically characterised by lower profits and negative free cash flow across the companies it covers. The note lays out expectations and near-term drivers for several individual groups.
Rheinmetall is rated "overweight" by Barclays with a price target of 02,125. The bank forecasts operating profit of 03 million for the quarter, an increase of 27% year-on-year. Barclays cautions that consensus numbers remain "messy" because early 2025 deliveries lifted comparables, making the base period tougher to navigate. The group is expected to show negative free operating cash flow of 00.15 billion for the quarter, compared with a positive 00.266 billion a year earlier. Barclays attributes part of the swing to a 01.35 billion payment tied to the NVL naval acquisition that was booked in the period. Rheinmetall shares trade at about 12.6 times 2028 estimated EV/EBIT, a discount of more than 15% to the sector average, even though consensus forecasts point to earnings per share growth of over 40%. Results are due May 7.
Leonardo, also rated "overweight" with a 074 price target, is forecast to post adjusted EBITA of 048 million for Q1 on revenue of 04.39 billion, equivalent to 10% organic growth. Barclays sits 4% above consensus on its full-year 2026 EBITA forecast of 02.19 billion, in part reflecting the consolidation of Iveco Defence from April 1. Leonardo is scheduled to issue a trading update on May 5.
Hensoldt carries an "equal weight" rating and a 095 target. Barclays models group adjusted EBITDA of 049 million for the quarter, up 63% year-on-year, which the bank says is driven by a recovery in Optronics and easier comparisons in Sensors following logistics disruptions in early 2025. Order intake is forecast at roughly 01.05 billion, which would equate to about a 2.3x book-to-bill ratio and is supported by a contract worth more than 00.4 billion from KNDS.
QinetiQ is rated "overweight" with a 540p target, but Barclays notes a cautious tone given the delayed publication of the UKfs Defence Investment Plan. The bank projects full-year revenue of 01.92 billion versus consensus of 01.93 billion, and forecasts operating profit around 0213 million implying an 11.1% margin. QinetiQ is due to report full-year results on May 21.
Saab is assigned an "underweight" rating with a SEK 515 target. Barclays expects Q1 revenue of SEK 18.96 billion and EBIT of SEK 1.65 billion, noting that the first quarter typically contributes only about 17-22% of full-year profit. The bank also expects free cash flow to remain negative through the first nine months of the year.
Thales is also classed "underweight," but Barclays has raised its price target to 070 from 060 to reflect foreign-exchange-driven earnings upgrades. The bank models Q1 revenue of 05.12 billion, implying 5.5% organic growth, which Barclays says is below the companyfs full-year guidance range of 6-7%. Thales is due to report Q1 revenue on April 21.
Barclays' note underscores a mix of seasonal effects, cash-flow variability and timing differences related to deliveries and acquisitions that together complicate the near-term earnings and cash-flow picture across the European defence cluster. While consensus earnings estimates have moved higher, the bank expects limited upside in Q1 results given the structural pattern of lower first-quarter profits and cash outflows for many names.
Data and forecasts cited in this article reflect Barclays Research projections as presented in the bank's note.