Calculated Defense Alliances Propel Impressive Growth And Profitability

Key Takeaways

• Strategic alliances and joint ventures are set to amplify technological advancements, revenue, and profitability.
  
• Robust backlog and defense focus are likely to sustain profitability and enhance future revenue streams.
  
• Political instability and leadership changes could affect Rheinmetall's revenue and operations, while reliance on defense growth risks revenue diversification and margin stability.

Catalysts

Provides mobility and security technologies worldwide.

• Rheinmetall is anticipating significant growth driven by large defense contracts, including joint ventures like the one with Leonardo in Italy, which could yield up to €50 billion over the next decade. This growth is expected to substantially boost revenue and earnings.
  
• The company's strategic alliances with firms like Honeywell and MBDA are expected to enhance technological capabilities and accelerate product development, potentially improving net margins through efficiency gains and new product offerings.
  
• The backlog for Rheinmetall is robust, with a growth rate of 41% and a value approaching €52 billion, indicating strong future revenue streams as these orders are fulfilled.
  
• The focus on defense-related business, with growth in areas like Vehicle Systems and Weapon and Ammunition, is expected to sustain high EBIT margins, projected at around 18% in defense, improving overall company profitability.
  
• Rheinmetall's operational free cash flow is expected to exceed €700 million, bolstering the cash position and providing resources for future investments, which could lead to improved earnings and financial stability.

Rheinmetall Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rheinmetall's revenue will grow by 24.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.7% today to 11.6% in 3 years time.
• Analysts expect earnings to reach €2.0 billion (and earnings per share of €46.66) by about November 2027, up from €687.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.2x on those 2027 earnings, down from 34.5x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 36.0x.
• 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 4.46%, as per the Simply Wall St company report.

Rheinmetall Future Earnings Per Share Growth

Risks

• Political instability in Germany could lead to delays in decision-making and order intakes, potentially impacting Rheinmetall's revenue and order backlog growth.
  
• Changes in CFO leadership might lead to strategic and operational uncertainties, which could affect the company's financial performance and earnings.
  
• There is risk of dependency on defense-related growth while civilian business remains stagnant, potentially impacting overall revenue diversification and margin stability.
  
• The company's significant reliance on government and large frame contracts poses a risk if there are changes in political priorities or budget allocations, affecting revenue projections.
  
• The requirement for significant capital expenditures and investments in IT and defense production capabilities could pressure free cash flow and financial flexibility going forward.

Valuation

• The analysts have a consensus price target of €626.8 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 €730.0, and the most bearish reporting a price target of just €496.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €17.5 billion, earnings will come to €2.0 billion, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 4.5%.
  
• Given the current share price of €546.0, the analyst's price target of €626.8 is 12.9% 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.