Vision 2030 Will Advance Defense And Manufacturing Capabilities

Key Takeaways

• The high demand for artillery from Ukraine and potential large contracts could significantly boost revenue and manufacturing capacity.
  
• Progress towards debt-free status and strategic acquisitions are likely to improve financial stability and enhance net margins.
  
• Heavy CapEx and reliance on defense growth amidst potential market volatility could strain cash flow if contracts or projections falter.

Catalysts

Provides mobility and security technologies worldwide.

• Rheinmetall’s Vision 2030 aims for sales growth to €30 billion, with potential expansion to €40 billion, largely without major M&A or CapEx, suggesting high operational leverage and potential for increased revenue.
  
• The significant demand for artillery from Ukraine and a potential €50 billion contract could provide substantial revenue growth, with investments also enhancing their manufacturing capacities.
  
• High projected order intake between €30 billion to €40 billion, leading to an order backlog of more than €80 billion by year-end, indicates strong future revenue streams.
  
• Progress towards being debt-free by the end of Q3 and high cash inflows from prepayments improve financial stability, potentially enhancing net margins due to reduced interest costs.
  
• The acquisition of a nitrocellulose producer to increase vertical integration might reduce costs in the weapons and ammunition business, likely benefiting net margins and earnings.

Rheinmetall Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rheinmetall's revenue will grow by 30.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.2% today to 11.7% in 3 years time.
• Analysts expect earnings to reach €2.5 billion (and earnings per share of €58.09) by about April 2028, up from €804.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €2.9 billion in earnings, and the most bearish expecting €2.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.9x on those 2028 earnings, down from 70.6x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 45.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.55%, as per the Simply Wall St company report.

Rheinmetall Future Earnings Per Share Growth

Risks

• The large CapEx requirement of €4.5 billion to build a plant for the Ukrainian artillery contract presents a financial risk. If the contract or expected down payments do not materialize, this could strain cash flow and impact net margins.
  
• The anticipated defense business growth does not account for new mergers and acquisitions, relying instead on current projections. Any shortfall in expected orders or delays could negatively affect revenue and earnings.
  
• The possibility of only flat growth in the civil business, contrasted with expected high growth in defense, could hinder overall company revenue if defense targets are not met.
  
• Potential impacts from tariffs and indirect parts for U.S. revenue have yet to be fully analyzed, posing a risk to future revenues if unresolved trade issues affect supply chains.
  
• The dynamic political and military environment, particularly with ongoing discussions in Germany and NATO, could lead to changes in anticipated budgets and requirements, potentially affecting Rheinmetall's revenue projections and order intake.

Valuation

• The analysts have a consensus price target of €1552.467 for Rheinmetall 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 €2220.0, and the most bearish reporting a price target of just €1037.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €21.7 billion, earnings will come to €2.5 billion, and it would be trading on a PE ratio of 29.9x, assuming you use a discount rate of 4.6%.
  
• Given the current share price of €1306.5, the analyst price target of €1552.47 is 15.8% higher.
  
• 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.