Rheinmetall: Is the rally coming to an end?

With less than a month to go before its quarterly results, Rheinmetall has emerged as one of the primary beneficiaries of European rearmament. In just a few years, the German group has completely overhauled its profile, effectively shifting into a new league in the eyes of investors. The question remains whether this momentum can still intensify.

A fixture in the armaments industry since 1889, the former supplier to the German Empire has survived through the ages. To reduce its reliance on state contracts, the group diversified into the automotive sector during the 1980s through the acquisition of Pierburg. However, faced with lackluster performance and a sector-wide crisis, Rheinmetall ultimately chose to refocus on its historical expertise.

 

The Ukrainian shock as a catalyst

 

Russia's invasion of Ukraine propelled the German company into the spotlight. While growth had been stagnating prior to 2022, its order book suddenly exploded. The announcement of a €100bn special fund for the Bundeswehr sent the share price soaring, doubling the company's valuation within a year. In a matter of months, Rheinmetall transitioned from a company scrutinized for ethical reasons to an indispensable player in a defense industry that once again is deemed investable.

 

A shift in category

 

Over the past decade, the industrial transformation has been striking. Between 2016 and the current fiscal year, cash flow per share has surged from €10.42 euros to an estimated €79.53. Simultaneously, its operating margin has jumped from 5.3% to 18.6%.

 

This mutation stems from the convergence of long-term strategic planning and the current military paradigm shift: the marginalization of automotive activities in favor of defense, which now serves as the almost exclusive driver of growth. For investors, Rheinmetall is now a highly profitable company, bolstered by the high-profile success of the Leopard 2 gun and its participation in the MGCS "tank of the future" project alongside KNDS, its main competitor, which is also planning a market debut.

 

How high can the stock go?

 

Having skyrocketed over 2000% since the start of the conflict in Ukraine, the market now demands perfection. With every earnings release, investors look for confirmation that the trend remains robust.

 

For now, Rheinmetall is multiplying strategic partnerships to secure its lead. On land, the group is betting on its Panther KF51 tank, already backed by agreements with Italy (Leonardo) and Hungary. In the air, it is establishing a presence in space via a €1.7bn contract with ICEYE. Finally, at sea, its alliance with Kraken opens the door to autonomous systems, a market estimated at over €1bn by AlphaValue.

 

Despite a consolidation phase last March, the stock's valuation continues to reflect an exceptional cycle for the defense sector. The stock's P/E is currently 42x expected 2026 earnings, although drops to around 20x for 2027, proving that the market is pricing in continued earnings growth. Rheinmetall is simultaneously richly valued and relatively affordable, even if the era of spectacular share price gains may now be a thing of the past.