If we look at the current political and social discussion in Germany about military and economic support of Ukraine while Russia’s war against Ukraine is in its third year, one conclusion is obvious: the consequences of Chancellor Olaf Scholz’s “turning point speech” on 27 February 2022 – three days after the outbreak of war – have not yet fully reached the general public. In particular, the strong performance of parties on the left and right in the recent European election in June 2024 is a clear indicator of this.

However, the stock market was much quicker and put shares from the defence technology sector on its list of favourites immediately after the outbreak of combat operations. This particularly applies to the Rheinmetall share, which has since almost quintupled in value from below €100 to new historic highs of €540 (mid August 2024), making it the star performer on the German stock market in recent years. Here, the turning point has already become reality!

The Group’s operational development is following this trend, setting new records for 2023 in terms of order intake (+110% to €11.8 billion in 2022), sales (+12% to €7.2 billion) and operating return (12.8% versus 12.0%). Things are continuing with a strong Q1 2024, which, with an order backlog of over €40 billion, is already signalling the next records for the current financial year and beyond.

However, with an expected increase in earnings per share of 63% this year and a further 39% next year, which implies a price/earnings ratio of 24.4x for 2024e and 17.5x for 2025e, the stock market has already significantly raised the bar for Rheinmetall (for comparison: DAX index 15.5x and 12.5x respectively; source: FactSet*). The revaluation of the share thus appears to have reached its limits for the time being. What will happen next?

A different world requires different priorities

The invasion of Russian armed forces in Ukraine shows once again that an aggressor will not shy away from military conflict to achieve its goals if a good chance of success is seen. The need for rearmament has now been accepted by the vast majority of political decision makers in western countries, as can be seen from the declarations and decisions of numerous governments to significantly increase defence spending in the future.

The market potential for Rheinmetall will multiply!

Considerable amounts of money are involved, as the consumption of the so-called “peace dividend” over the past decades has led to serious doubts about the defence capability in western Europe, especially in Germany. The last report by the Parliamentary Commissioner for the Armed Forces made this all too clear for the Bundeswehr by identifying blatant deficiencies, particularly in the area of material. Therefore, a lot of catching up is to be done. The “special funds” of €100 billion, announced by Chancellor Scholz in his “turning point speech” can only be a first step; that much has already become clear.

The increase in defence spending will undoubtedly lead to resistance in terms of distribution policies – elections can be vitalized by social benefits, but an increase in defence spending cannot. But honestly: isn’t our freedom worth two cents of every euro of our Gross Domestic Product (GDP)? The target of 2% of GDP for defence spending that NATO countries set themselves in 2014 refers to this exactly. Germany was only at around 1.5% in 2021, while the average of European NATO countries was at around 1.7% (source: NATO).

Compared to the level before the start of the war in Ukraine, an increase to 2% of GDP would therefore mean an increase in defence spending of around a third for Germany and around a fifth for the European NATO members, plus an appropriate adjustment for inflation. An additional boost should come from an increased quota for material procurement, as this has so far been below the targeted 20% of the budget for many NATO members (Germany 16.7%). Another lever lies in a higher EU quota for defence spending: currently, EU companies only have a share of around 20%, but the EU Commission wants this to rise to 50% by 2030, an increase of 150%. In view of this triple catalyst, the forecast that the relevant market volume for Rheinmetall will increase multiple times over in the coming years is very well founded.

Managing growth as a challenge for the coming years

The high order backlog (including framework contracts) as of the end of March, which is 5.6 times of last year’s sales in arithmetical terms – and, above all, the bulging project pipeline – provide a good basis for the management’s growth plans for the coming years (medium-term targets by 2026: sales of €15 billion with an operating return of 15%). The biggest challenge for the company now is to create sufficient capacities to process the flood of orders as smoothly and profitably as possible. A whole series of projects to this end (e.g. new sites in Ukraine, new ammunition factories in Germany, Hungary, and Lithuania, a new subsidiary in Romania) are already being implemented.

Further strategic measures for additional imagination

In addition to the existing operational business, further strategic steps by the management are likely to provide Rheinmetall with added growth potential. This primarily includes possible acquisitions and the establishment of joint ventures in order to expand the company’s international presence (particularly in the USA) and strengthen its technical capabilities (especially in the areas of digitalization, AI and space technologies).

Concerning civilian activities, which did only account for 28% of sales and 13% of the Rheinmetall Group’s operating result in 2023, many analysts are calling for a final portfolio adjustment, even if Rheinmetall’s management has always argued against this to date. CEO Armin Papperger recently emphasised in an interview that the civilian sector generates an annual operating profit of around €150 to 200 million. Analysts believe that with a clear focus on defence technology, Rheinmetall should finally shed the stigma of a conglomerate for many investors and open up additional valuation potential for the share.

Revaluation of Rheinmetall share not yet finalised

There is no doubt that Rheinmetall’s brilliant share price increase since February 2022 already contains a good portion of premature praise – the stock market is indeed impatient. And the consolidation of the share since its high of €560 on 8 April 2024 shows that it is becoming increasingly difficult for the company to meet the growing expectations of the capital market in the short term.

There is no doubt that Rheinmetall’s brilliant share price increase since February 2022 already contains a good portion of premature praise – the stock market is indeed impatient. And the consolidation of the share since its high of €560 on 8 April 2024 shows that it is becoming increasingly difficult for the company to meet the growing expectations of the capital market in the short term.

• * As of 21 June 2024

Further information and key figures on the Rheinmetall share can be found on our corporate website under Investor Relations.