Company Reports

Wide-moat Rheinmetall reported a very strong second quarter, marked by significant financial growth and strategic advancements across its divisions. The company confirmed its full-year guidance with 91% of full-year sales coverage already reached in the first half of the year and 50% of the projected EUR 10 billion full-year sales target already delivered. We are maintaining our fair value estimate and consider shares undervalued.

Rheinmetall started 2024 on a strong note with a significant backlog surpassing EUR 40 billion. The firm reported double-digit sales growth and substantial margin expansion. Its sales surged 16% year over year with weapons and ammunition up by 70% year on year, followed by a 26% increase in electronic solutions. The operating result rose 60% year on year, expanding the margin to 8.5% from 6.1%, primarily due to high-margin weapons and ammunition, especially from Expal, which we estimate to have a stand-alone margin between 28% and 30%. Weapons and ammunition show strong seasonality with over 40% of sales expected in the fourth quarter. Electronic solutions sales grew 26% with a margin increase from 5.4% to 6%, driven by substantial deliveries in Germany, particularly for the Skyranger air defense system.

Rheinmetall has a well-diversified portfolio across geographies and platforms, with 70% of its revenue from its defense business and 30% from its civil one. Escalating global security concerns are driving higher growth in the defense market as many countries in Europe have underspent since the Cold War ended. European nations are expected to boost defense budgets to a minimum of 2% of gross domestic product, a trend likely to accelerate due to the Russia-Ukraine war. This situation offers a significant opportunity for Rheinmetall to benefit from its well-diversified geographical presence and product portfolio. Rheinmetall generates over 30% of its revenue from Germany, 36% from other European countries, 16% from Asia (with a particular focus on Australia), and the rest from the US and other markets.

We're raising Rheinmetall's valuation to EUR 730 from EUR 445 after factoring in the potential US M2 Bradley replacement contract and boosting our long-term earnings-growth rate assumption from 3% to 5%. Without the US contract, the fair value stands at EUR 680, still well above the current market price.

Wide-moat Rheinmetall reported another strong set of results for 2023, with a record backlog of EUR 38.3 billion representing more than 5.4 times annual sales. Management raised its operating margin guidance, expecting to reach 14%-15% in 2024 versus the previous expectation of 2026. We will incorporate the new guidance into our model, but for now, we maintain our fair value estimate.

We are increasing our fair value estimates for wide-moat Rheinmetall to EUR 445 from EUR 343 given our greater confidence in margin upside in the missiles and ammunition division.

Rheinmetall has a well-diversified portfolio across geographies and platforms, with 70% of its revenue from its defense business and 30% from its civil one. Escalating global security concerns are driving higher growth in the defense market as many countries in Europe have underspent since the Cold War ended. European nations are expected to boost defense budgets to a minimum of 2% of gross domestic product, a trend likely to accelerate due to the Russia-Ukraine war. This situation offers a significant opportunity for Rheinmetall to benefit from its well-diversified geographical presence and product portfolio. Rheinmetall generates over 30% of its revenue from Germany, 36% from other European countries, 16% from Asia (with a particular focus on Australia), and the rest from the US and other markets.

Rheinmetall has a well-diversified portfolio across geographies and platforms, with 70% of its revenue from its defense business and 30% from its civil one. Escalating global security concerns are driving higher growth in the defense market as many countries in Europe have underspent since the Cold War ended. European nations are expected to boost defense budgets to a minimum of 2% of gross domestic product, a trend likely to accelerate due to the Russia-Ukraine war. This situation offers a significant opportunity for Rheinmetall to benefit from its well-diversified geographical presence and product portfolio. Rheinmetall generates over 30% of its revenue from Germany, 36% from other European countries, 16% from Asia (with a particular focus on Australia), and the rest from the U.S. and other markets.

We initiate coverage of Rheinmetall with a wide moat and fair value estimate of EUR 343 per share, backed by expected rises in defense spending due to global threats and a strategic shift to ammunition and services.