Expansion Of Production Capacity Will Meet Europe’s Future Defense Demands

Key Takeaways

• Rheinmetall stands to gain from increased European defense budgets, with strategic expansions in production likely boosting revenue and improving margins.
  
• Strong joint ventures and digitization efforts are set to enhance future earnings and profit margins, supported by aggressive growth strategies in ammunition and electronics.
  
• Reliance on defense growth amidst execution challenges and weak civilian performance could strain cash flow and introduce uncertainty to revenue projections.

Catalysts

Provides mobility and security technologies worldwide.

• The European defense spending is expected to significantly increase due to geopolitical factors and statements from European leaders, suggesting a growing defense budget. Rheinmetall anticipates benefiting from this trend, particularly in Germany, with the potential to capture a significant market share. This is likely to positively impact the company's revenue.
  
• The company is planning to increase its workforce by developing new factories and production capacity, specifically in ammunition and rocket motor production, to meet anticipated demand. This strategic expansion is expected to drive future revenue growth and operational efficiencies, potentially improving net margins.
  
• Rheinmetall is focusing on strong joint ventures and partnerships across Europe, leveraging its defense capabilities to engage with multiple governments. This strategy should bolster its order backlog and long-term earnings potential through new contracts and cooperation agreements.
  
• The integration of digitization into Rheinmetall's projects and securing major digitization contracts reflect a focused strategy on modernizing and future-proofing its offerings. This focus is anticipated to enhance revenue streams and profit margins, as digital solutions usually offer higher margins.
  
• Strategic M&A and organic growth investments, particularly in ammunition production and electronic solutions, suggest an aggressive growth outlook. The operational free cash flow generated will support further expansion and potentially drive significant earnings growth, as indicated by discussions on potential new contracts and production capabilities.

Rheinmetall Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rheinmetall's revenue will grow by 31.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.2% today to 11.1% in 3 years time.
• Analysts expect earnings to reach €2.4 billion (and earnings per share of €56.37) by about March 2028, up from €804.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €2.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.5x on those 2028 earnings, down from 74.6x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 31.3x.
• 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 4.79%, as per the Simply Wall St company report.

Rheinmetall Future Earnings Per Share Growth

Risks

• The civilian business segment is experiencing no growth, with a reported decline of 2% in 2024, which could put downward pressure on overall revenue and profit margins if not improved.
  
• Delays in expected project nominations and backlog targets indicate potential challenges in execution and order fulfillment, which could impact revenue growth and future earnings.
  
• The reliance on defense sector growth and the discussion around Zeitenwende 2.0 suggest that future performance is contingent on political decisions and increased defense spending, introducing uncertainty and potential risk to revenue projections.
  
• The need for significant investment in capacity expansion might strain free cash flow and impact the ability to generate higher net margins if not matched by corresponding increases in demand and revenue.
  
• Persistent weak performance and market pressure in the Power Systems division could lead to stagnating or declining contributions to overall revenue, particularly if transformation efforts do not yield desired results.

Valuation

• The analysts have a consensus price target of €1506.8 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 €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 €22.0 billion, earnings will come to €2.4 billion, and it would be trading on a PE ratio of 30.5x, assuming you use a discount rate of 4.8%.
  
• Given the current share price of €1380.0, the analyst price target of €1506.8 is 8.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.