Global Defense Spending And AI Will Open Future Markets

Key Takeaways

• Saab is set to benefit from increasing global defense spending and prioritization of European self-reliance, supporting sustained demand and reduced revenue volatility.
  
• Focus on advanced technologies, sustainability, and expanding service offerings should drive high-margin growth, recurring revenues, and contract differentiation.
  
• Saab faces revenue and margin risks from reliance on government contracts, heavy upfront investments, tightening export controls, rising competition, and escalating digitalization costs.

Catalysts

Provides products, services, and solutions for military defense, aviation, and civil security markets Internationally.

• The significant ramp-up in global defense spending, especially following the recent NATO commitment for member states to target 5% of GDP by 2030-2035, directly supports sustained demand for Saab's advanced defense solutions. Saab's strong backlog (~SEK 200 billion) and rising book-to-bill ratio position it to benefit from this long-duration trend, likely driving outsized topline growth over the next several years.
  
• Heightened adoption of AI, autonomous platforms, and digital warfare technologies is accelerating investment requirements from governments globally. Saab's committed R&D in emerging technologies (e.g., AI-enabled Gripen fighters, collaboration with General Atomics on drones, automated manufacturing) should increase its share in high-margin, next-generation contracts, boosting future earnings and improving net margins.
  
• Increasing need for European defense sovereignty and industrial self-reliance positions Saab as a preferred supplier, potentially capturing incremental share of refocused European defense budgets and benefiting from multi-year mega contracts-this geographical diversification and preference for local vendors may reduce revenue cyclicality and mitigate single-country political risks.
  
• Saab's investments in sustainable technologies (e.g., Net Zero targets, capability to operate aircraft on sustainable fuels) cater to intensifying regulatory and governmental procurement trends toward green defense solutions. This could enable Saab to win orders over less-adapted peers, supporting both revenue expansion and margin resilience as sustainability becomes a contract differentiator.
  
• Ongoing expansion in lifecycle services, support and digital contracts (e.g., maintenance, cybersecurity, training via Combitech) is increasing recurring/annuity revenue-a trend that enhances earnings predictability, reduces volatility tied to large equipment sales, and contributes to stable, higher net margins over time.

Saab Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Saab's revenue will grow by 17.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.4% today to 8.8% in 3 years time.
• Analysts expect earnings to reach SEK 9.8 billion (and earnings per share of SEK 18.33) by about September 2028, up from SEK 5.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.9x on those 2028 earnings, down from 54.9x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 53.4x.
• Analysts expect the number of shares outstanding to grow by 0.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.71%, as per the Simply Wall St company report.

Saab Future Earnings Per Share Growth

Risks

• Saab's heavy dependence on government contracts-particularly from Sweden and a small number of key export markets-exposes it to political decision-making, budget cycles, and potential shifts in defense spending priorities, which could introduce volatility or sudden declines in future revenues.
  
• Requirement for sustained, front-loaded investments in capacity expansion (factories in India, U.S., and Sweden) and advanced R&D (especially for AI, autonomous systems, and digitalization) heightens the risk of margin pressure and negative free cash flow if order intake does not keep pace with cost escalations, potentially impacting net earnings and financial flexibility.
  
• Rising global scrutiny on arms exports and potential tightening of export controls from entities like the EU or UN could restrict Saab's access to critical international markets, particularly as more than half of recent order intake is domestic, which may ultimately limit revenue growth and diversification over the long term.
  
• Intensifying competition from both established global defense firms and new entrants leveraging digital and AI-based defense solutions could erode Saab's market share, compress margins, and force higher ongoing R&D expenditure to remain competitive, with the risk that customers may not pay sufficiently higher prices to cover these investments, impacting long-term profitability.
  
• Ongoing and increasing investment in digitalization, IT security, and automation-while necessary-may lead to higher corporate costs and lower gross margins in the near future, and exposes Saab to the risk of execution delays or cost overruns (noted in sectors like underwater/autonomous vehicles and Aeronautics), potentially resulting in impaired earnings and delayed profitability realization.

Valuation

• The analysts have a consensus price target of SEK504.571 for Saab based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK600.0, and the most bearish reporting a price target of just SEK374.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK112.3 billion, earnings will come to SEK9.8 billion, and it would be trading on a PE ratio of 32.9x, assuming you use a discount rate of 5.7%.
• Given the current share price of SEK532.0, the analyst price target of SEK504.57 is 5.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.