Geopolitical Shifts Will Trim European Orders Though NATO Backing Persists

Key Takeaways

• Exposure to shifting defense budgets and regulatory constraints threatens future revenue, order stability, and profit margins.
  
• Technological disruption and supply chain fragility may require costly adaptation, undermining competitiveness and operational leverage.
  
• Surging defense demand, strategic tech expansion, and production scale-up position Rheinmetall for sustained growth, margin strength, and resilience across market and geopolitical cycles.

Catalysts

Provides mobility and security technologies worldwide.

• An unexpected de-escalation of geopolitical tensions or a sharp reversal in European defense spending priorities could force governments to cut back on large-scale procurement programs, leading to significant order cancellations or delays and a reduction in Rheinmetall's order backlog and long-term revenue growth.
  
• Intensifying anti-defense sentiment and the possibility of stricter ESG or regulatory constraints around arms production could restrict Rheinmetall's access to capital, increase compliance costs, and reduce its future eligibility for long-term fixed contracts, ultimately compressing net margins over time.
  
• Rapid advancements in alternative or disruptive technologies, particularly in fields like autonomous systems, commercial AI, and private space, may outpace Rheinmetall's current product portfolio and render legacy platforms less relevant, requiring costly R&D catch-up spend that drags down profitability and earnings quality.
  
• Heavy dependence on cyclical European government defense budgets exposes Rheinmetall to concentrated political risk; should fiscal realities or elections drive budget cuts or procurement pauses, the company would see sharp revenue declines and potentially fall short of ambitious top-line targets even as expansion investments continue.
  
• Global supply chain fragmentation, increased export controls, and skill shortages across the defense sector could significantly delay deliveries, elevate input costs, and force Rheinmetall to operate below capacity, eroding both margins and the expected operational leverage from recent and planned factory investments.

Rheinmetall Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Rheinmetall compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Rheinmetall's revenue will grow by 29.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.0% today to 11.9% in 3 years time.
• The bearish analysts expect earnings to reach €2.7 billion (and earnings per share of €61.79) by about July 2028, up from €839.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 35.6x on those 2028 earnings, down from 96.9x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 110.8x.
• Analysts expect the number of shares outstanding to grow by 4.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.43%, as per the Simply Wall St company report.

Rheinmetall Future Earnings Per Share Growth

Risks

• Rapid and sustained increases in European and NATO defense budgets, as highlighted by multi-year commitments up to and above 3.5% of GDP, present a long-term secular tailwind that could underpin Rheinmetall's revenue and backlog growth for many years.
  
• Massive multi-year order backlogs (now over 80 billion euros with potential to exceed 100 billion), conversion of framework to fixed contracts, and increasingly predictable milestone/down payments provide substantial visibility and planning security for medium-term and long-term top-line and cash flow, challenging the prospect of declining financials.
  
• Strategic expansion into advanced technology segments-such as joint ventures for missile and satellite production with Lockheed Martin and ICEYE, as well as leadership in digitization and electronic solutions-positions Rheinmetall to benefit from secular modernization and digitalization trends, supporting higher margins and diversified earnings.
  
• Ongoing ramp-up of pan-European and international ammunition, armored vehicle, and air defense production capacity, combined with innovative moves like repurposing civilian plants, equips Rheinmetall to meet unprecedented demand and capture market share, directly lifting revenue and operating margins.
  
• A strong balance sheet, evidenced by improved equity ratios, sound cash flow, and favorable credit ratings, enables aggressive capex, M&A, and vertical integration (including high-margin component manufacturing), supporting robust earnings growth and net margin resilience through economic or political cycles.

Valuation

• The assumed bearish price target for Rheinmetall is €1596.26, which represents two standard deviations below the consensus price target of €2044.62. This valuation is based on what can be assumed as the expectations of Rheinmetall's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €2300.0, and the most bearish reporting a price target of just €1550.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €22.9 billion, earnings will come to €2.7 billion, and it would be trading on a PE ratio of 35.6x, assuming you use a discount rate of 5.4%.
• Given the current share price of €1777.0, the bearish analyst price target of €1596.26 is 11.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.