The defense industry had a banner year in 2025. The S&P Global Aerospace & Defense Select Industry Index surged 51.5% last year. And if you look at the headlines, it's really no wonder why. The state of the world has left many countries nervous and seeking to bolster their militaries.
The U.S. is already the biggest defense spender in the world, with a military budget worth more than the spending of the next nine largest spenders combined at nearly $1 trillion.
As such, American defense stocks like Arlington's Leonardo DRS (DRS 0.74%) have been perennially good investments. Leonardo was up nearly 24% in the last year, but over the past five years, it has seen a return of nearly 303%.
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It produces everything from targeting and sensor equipment to night vision goggles to naval propulsion systems. Leonardo is involved in the production of a vast quantity of American military equipment, like the Columbia and Virginia class submarines, the M1 Abrams tank and Bradley IFV, and the F-35 fighter and Apache helicopter, to name a few.
Leonardo has seen steady growth over the past five years with a revenue compound annual growth rate (CAGR) of 5% and diluted earnings-per-share (EPS) growth of 14% over the same period.
But while American defense stocks are growing steadily, European defense stocks are booming and Germany's Rheinmetall AG (RNMBY +0.92%) is leading the way.
The German defense giant turns 137 this year, and its one-year return of 232% and five-year return of roughly 1,880% make Leonardo look tiny by comparison.
That's mostly driven by the German government's pledge to hit the NATO defense spending target of 3.5% of GDP over the next few years, which for Germany involves spending of 650 billion euros over the next five years.
Germany's defense spending increase in the past couple of years has seen it jump from the eighth-largest defense spender in 2019 (behind France, Saudi Arabia, and the United Kingdom), to the fourth-largest today, behind only the U.S., China, and Russia.
As for what Rheinmetall does, it would be easier to list the defense products it doesn't produce. But to name a few:
- The 120mm cannon for the Leopard II, which is one of the most widely used tanks in the world, fielded by 21 different militaries.
- The Boxer, Lynx, and Puma IFVs, one or all of which are used by Germany, Italy, Australia, and the Netherlands. Note, the U.S. is considering adopting the Lynx, which would be a windfall for Rheinmetall.
- Top-notch artillery and air defense systems and the ammunition for them.
- After its acquisition of Naval Vessels Lürssen B.V. & Co. KG, it produces ships for the German navy.
OTC: RNMBY
Key Data Points
Rheinmetall is also working on cutting-edge hardware like the next-generation Panther Kf51 tank, loitering munitions, and anti-drone solutions based on lessons learned in Ukraine, where the Leopard II has been fielded by the Ukrainian army.
As for its bottom line, Rheinmetall's full-year 2025 results aren't out yet, but coming into the end of the year, it projected a total sales CAGR of 30%, backlog CAGR of 45%, and a 270 basis point boost to its operating margin since 2023.
Compare their growth and performance, and Rheinmetall makes a compelling case to buy German for your defense industry exposure.
