US Politician’s Stock Pick in Rheinmetall $RHM.DE Soars 267%, Reflecting Europe’s Defence Resurgence

The re-evaluation of the European defence sector over the past two years has been nothing short of profound, with Germany’s Rheinmetall AG serving as its most potent symbol. The company’s share price appreciation is not merely a reaction to conflict but the market’s pricing-in of a new, long-term security architecture in Europe. This shift is underpinned by a tectonic change in political will, translating directly into historic order backlogs and ambitious growth targets that have propelled the firm’s valuation into territory that warrants careful examination.

A Structural Re-Rating, Not a Cyclical Rally

For decades, European defence spending was a study in managed decline. The landscape was irrevocably altered in early 2022. Germany’s announcement of its Zeitenwende, or “turning point,” marked the end of an era. This policy pivot was substantiated by a €100 billion special fund for the armed forces and a commitment to meeting NATO’s target of spending 2% of GDP on defence. For Rheinmetall, a key contractor for the German Bundeswehr and a crucial supplier of artillery shells and armoured vehicles across the continent, this was a paradigm shift.

The tangible result is a colossal order book. As of the first quarter of 2024, Rheinmetall reported a consolidated order backlog of €40.2 billion, a figure that represents several years of future revenue.¹ This provides a degree of revenue visibility that is exceptionally rare in the industrial sector. The company’s management has guided for annual sales to reach between €13 billion and €14 billion by 2026, a significant increase from the €7.2 billion reported for 2023.^2,3 This is not a cyclical upswing; it is the financial manifestation of a continent rearming.

Valuation in the Crosshairs

Rheinmetall’s operational growth has been matched by its market performance, which has dramatically outpaced both its European and American peers. While this reflects its advantageous position in land systems and munitions, two areas of acute demand, it also raises legitimate questions about its valuation. A comparison with other key players in the European defence industry provides essential context.

Data sourced from market feeds and company reports as of late 2024. Forward P/E and revenue estimates are based on analyst consensus.

The data suggests that while Rheinmetall’s forward earnings multiple is broadly in line with a peer like BAE Systems, its anticipated revenue growth is substantially higher. This premium is the market’s bet that Rheinmetall can successfully convert its backlog into profitable revenue at a faster rate than its competitors. Analysts have taken note, with firms like UBS and Morgan Stanley raising price targets throughout the year, citing the robust demand environment and improved earnings visibility.⁴

From Forecasts to Fulfilment

The narrative surrounding Rheinmetall and its peers is now pivoting from demand to execution. Securing multi-billion-euro contracts is one challenge; delivering on them profitably is another entirely. The entire European defence industrial base is facing constraints related to skilled labour, raw material sourcing, and supply chain capacity. Ramping up production of sophisticated systems like the Panther KF51 tank or expanding artillery shell output by a factor of ten is not a simple task.

The observation of a US politician acquiring a stake in a German defence firm, while notable, is arguably a lagging indicator of a trend that was already well-established within institutional circles. Such trades often capture public attention, but they are a symptom, not a cause, of the underlying strategic realignment. The more salient question for investors is whether Rheinmetall can protect its operating margins, which stood at 14.3% in the third quarter of 2024, amidst inflationary pressures and the immense logistical challenge of its growth trajectory.⁵

The market has, for now, priced in a scenario of near-flawless execution. The investment case no longer rests on whether demand will materialise, but on how efficiently it can be met. Any significant operational misstep, delivery delay, or unexpected cost overrun in a single quarter could introduce a volatility that has been absent during the stock’s relentless climb.

As a concluding hypothesis, the greatest non-geopolitical risk to Rheinmetall’s valuation is not a decline in its order book but an erosion of its margins. The market appears to be underwriting the company’s ambitious 2026 targets at face value. A more realistic scenario might involve a 100 to 150 basis point compression in expected operating margins as the full costs of scaling production become apparent. Such a development, which is not yet priced into consensus estimates, would likely force a substantial re-rating of the stock, presenting a far more attractive entry point for those confident in the long-term structural theme but wary of the current valuation.

References

1. Rheinmetall AG. (2024, May 15). Quarterly statement for the first three months of 2024. Retrieved from Rheinmetall Investor Relations.
2. Rheinmetall AG. (2024, March 14). Annual Report 2023. Retrieved from Rheinmetall Investor Relations.
3. Reuters. (2024, March 14). Rheinmetall forecasts 2026 sales jump as Ukraine war, U.S. decoupling fuel orders. Retrieved from Reuters.
4. Investing.com. (2024, May 22). Rheinmetall stock price target raised by Morgan Stanley to €220.0. [This reference appears to be a headline aggregation and is used for sentiment context; primary analyst reports are proprietary].
5. Reuters. (2024, November 7). Rheinmetall narrows operating margin guidance on record Q3 sales. Retrieved from Reuters.
6. @QuiverQuant. (2024, May 28). [Post regarding observation of a politician’s trade in Rheinmetall stock]. Retrieved from https://x.com/QuiverQuant/status/1795460007175078301