Rising NATO And European Budgets Will Drive Production Integration

Key Takeaways

• Expanding European defense budgets and Rheinmetall's strong positioning ensure sustained order growth, revenue strength, and reduced competitive risk in key segments.
  
• Investments in automation, vertical integration, and emerging defense technologies enhance margins, cash flow, and operational efficiency for long-term earnings resilience.
  
• Overreliance on European defense contracts and complex expansion efforts expose Rheinmetall to political, regulatory, and operational risks that threaten revenue stability and profit margins.

Catalysts

Provides mobility and security technologies in Germany; the rest of Europe; North, Middle, and South America; Asian regions, and internationally.

• The substantial increase in European and NATO defense budgets, particularly Germany's multiyear boost in core defense spend to 3.5% of GDP, combined with Rheinmetall's strong positioning and minimal competition in critical vehicle and ammunition programs, indicates a large, sustainable order intake pipeline (expected €80-120 billion backlog by mid-2025/2026)-directly supporting robust top-line revenue growth for years to come.
  
• The ongoing shift by governments to prioritize homeland security, critical infrastructure protection, and digital battlefield solutions, reflected in Rheinmetall's fast-growing Electronic Solutions segment, expansion into unmanned/drone systems, and advanced communication/satellite programs (like TaWAN) positions the company to capture higher-margin emerging segments-boosting medium-term net margins and earnings quality.
  
• Execution on a major production capacity expansion (notably, ammunition, vehicles, and rocket motors/plants coming online through 2027) and accelerated vertical integration of key inputs (energetics, chemicals, powder) will allow Rheinmetall to ramp up output to meet surging demand, improve pricing power, and realize higher operating leverage-supporting both revenue growth and durable margin expansion.
  
• Multi-year, recurring contract frameworks and new joint ventures with top global OEMs (Lockheed, Anduril, Boeing, Reliance, Leonardo, etc.), combined with government support for local defense supply chains, significantly reduce competitive risk and provide long-term earnings visibility, supporting recurring cash flows and strengthening the company's market share across Europe and select international markets.
  
• The company's focus on automation, sustainability investments, and transformative divestiture of non-core/civilian businesses is expected to improve cost structure, operational efficiency, and margin resilience, reinforcing its ability to convert record order books into strong free cash flow and improved return on invested capital over the next decade.

Rheinmetall Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rheinmetall's revenue will grow by 35.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.9% today to 12.7% in 3 years time.
• Analysts expect earnings to reach €3.4 billion (and earnings per share of €75.4) by about September 2028, up from €845.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €2.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 39.0x on those 2028 earnings, down from 95.1x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 106.7x.
• Analysts expect the number of shares outstanding to grow by 5.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.52%, as per the Simply Wall St company report.

Rheinmetall Future Earnings Per Share Growth

Risks

• Overconcentration in the European defense market, particularly reliance on German government orders and procurement cycles, exposes Rheinmetall to risks from regional political shifts, future defense budget constraints, or policy changes, which could undermine revenue stability and long-term growth.
  
• Execution risks around rapid capacity expansion, integration of multiple M&A deals, and broad product portfolio (including new missile, drone, and naval technologies) may strain management resources and lead to operational inefficiencies, cost overruns, and negative impact on net margins and return on investment.
  
• Heavy reliance on timely governmental permissions, regulatory approvals, and downpayments (e.g., Spanish ammunition plant, German government negotiations) increases exposure to bureaucratic or political delays, potentially causing working capital build-up, negative free cash flow, and deferred earnings recognition.
  
• Increased capital expenditure for vertical integration, automation, and new product lines requires efficient scaling and precise demand capture; if market demand or geopolitical conditions shift, return on capital may fall short, weakening longer-term earnings quality and financial flexibility.
  
• Heightened geopolitical, supply chain, and input risk-including supply of critical materials, export controls, and changing attitudes toward defense procurement (e.g., ESG mandates and regulatory scrutiny)-could disrupt order fulfillment, increase compliance costs, or restrict access to certain international markets, leading to earnings volatility and margin pressure.

Valuation

• The analysts have a consensus price target of €2102.308 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 €2280.0, and the most bearish reporting a price target of just €1650.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €26.4 billion, earnings will come to €3.4 billion, and it would be trading on a PE ratio of 39.0x, assuming you use a discount rate of 5.5%.
• Given the current share price of €1754.0, the analyst price target of €2102.31 is 16.6% 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.