Rheinmetall: A cult object

Boosted by European rearmament and the weakening of the American umbrella, Rheinmetall has eclipsed the main armaments players on the old continent. Its business, which has grown 28-fold in ten years, embodies the new geopolitical reality. But can this meteoric rise last? To answer this question is to begin by asking another…

Is Trumpian geopolitics positive or negative for European defense companies? The answer is not obvious, and explains the confusion still prevailing on financial markets. Rearmament is an underlying trend, but last week Donald Trump floated the idea of a tripartite USA/China/Russia conference to agree on halving the military spending of these superpowers. At the same time, the US President urged Europeans to increase their spending in this area. These seemingly contradictory signals nevertheless underline the need for Europe to gain military autonomy from the US Army. This implies a major military overhaul, at a time when none of Western Europe's armies has the capabilities needed for a conflict lasting more than a few weeks, or to project itself autonomously into external operations.

That's why Europe's listed defense companies are continuing their ascent into 2025. And this despite the prospects of a negotiated peace between Ukraine and Russia. The symbol of this craze is Rheinmetall. The German group is now referred to by the press as an "arms giant", whereas not so long ago it was far removed from the stars of the sector. In the space of ten years, its share price has multiplied by 28, bringing its current capitalization to around $37 billion... ahead of France's Thales ($36 billion) and not far behind that of the UK's BAE Systems ($46 billion). In the meantime, geopolitics has hardened, war has broken out on Europe's doorstep, and Germany has realized the weakness of its troops. Rheinmetall's order book has exploded in impressive proportions. And there's more to come.

"In the future, 20 to 30% of the budget increase could go to Rheinmetall. This represents potential additional annual sales of around 10 billion euros. By way of comparison, Rheinmetall is aiming for sales of around ?20 billion in 2027", stresses German research firm DZ Bank, which is far from fearing a market collapse. "While a swift end to the conflict would considerably limit, if not reduce to zero, Ukraine's day-to-day resupply needs for defense technology, weapons and ammunition... it is clear that the ceasefire or potential peace solution must be secured by European troops."

A very confident Chairman

Rheinmetall CEO Armin Papperger believes that the changing geopolitical context and American pressure could radically transform the continent's arms market. "For our company, this means we have to expand even more than we had planned. Trump has made it clear that Europe must assume its responsibilities, and that the United States is no longer going to ensure European security on its own," he stressed at the security conference held in Munich last weekend.

The potential impact of an increase in military spending is colossal: raising the German defense budget to 2.5% or 3% of GDP could inject between 60 and 70 billion euros into the sector every year. This financial windfall would directly benefit defense companies, and Rheinmetall intends to take full advantage of it.

Critical ammunition shortage in Europe

Armin Papperger took the opportunity to sound the alarm: Europe has a critical shortage of military stocks. "When it comes to ammunition, we've given almost everything to Ukraine. Putin knows this, of course, and that's why we have to act," he insisted, pointing out that no European country currently meets NATO standards requiring combat stocks for 30 days of operations.

Rheinmetall has embarked on a major investment program, in particular to double the capacity of its powder plant in Aschau, Bavaria, in order to reach an output of 12,000 to 14,000 tonnes per year by 2026.

European consolidation lags behind

The recomposition of the European defense landscape is deemed necessary by experts, but is complicated by historical strongholds and fears of loss of industrial sovereignty. At the end of last week, Rheinmetall's CEO dismissed the idea of consolidation with KNDS (the other major German group specializing in land-based military equipment, the result of an alliance between France's Nexter and Germany's Krauss-Maffei Wegmann). Rheinmetall had also submitted a non-binding offer for ThyssenKrupp 's TKMS naval division at the end of 2024. However, the sale process was suspended in favor of a spin-off of the business. "This means that all interested parties are excluded," regrets Papperger.

And the valuation?

While Rheinmetall's growing importance in the European defense landscape is undeniable, its stratospheric stock market track record sometimes frightens investors. However, the company's exploding order book and future earnings prospects are flattening valuation ratios at a rapid pace. For example, the company is currently trading at over 40 times average earnings for 2024 (to be announced on March 12). However, this multiple has fallen to 28 times expected earnings in 2025 and 20 times in 2026. Based on cash earnings, the case is even more expensive, because increasing production capacity is costly. But as is often the case in the stock market, the narrative is of considerable importance, and Rheinmetall is at the heart of the rewriting of European history.

12 other European defense players (to be found in the MarketScreener thematic list on defense)

Airbus: Europe's leading aerospace and defense company, Airbus generates around 20% of its sales in this sector. Its military portfolio includes aircraft such as the A400M, A330MRTT, C295 and Eurofighter Typhoon, as well as UAVs and defense electronics. Airbus is also a partner in strategic joint ventures, including MBDA for missiles, alongside BAE Systems and Leonardo, and ArianeGroup for space launchers, in collaboration with Safran.

Safran: specialized in high-precision technologies, French group Safran is a key player in civil and military aeronautics. The defense sector accounts for 24% of total sales, with products such as optronics, avionics, navigation, tactical UAVs and mission-critical software. Safran is also Airbus' partner in Ariane.

BAE Systems: The UK's leading defense group, BAE Systems is present in all military fields, from infantry equipment to missiles, submarines, cyber defense and aviation, notably via the Eurofighter Typhoon program. The Group is by far the most exposed to the United States on the Old Continent (48% of revenues), ahead of Europe (25%).

Thales: a major French defense electronics group, Thales derives 45% of its earnings from the military sector. Its activities cover secure information and communication systems, defense mission systems, as well as land and air systems. Thales also holds a 35% stake in Naval Group, and counts the French state (25.7%) and Dassault Aviation (24.6%) among its main shareholders.

MTU Aero Engines: a German company specializing in the manufacture and maintenance of aircraft engines, MTU Aero Engines is heavily exposed to the civil aviation sector. This explains the company's more moderate stock market performance compared with other players in the defense sector.

Dassault Aviation: renowned for its fighter jets, Dassault Aviation is the manufacturer of the Rafale fighter, which has enjoyed notable export success. Defense accounts for between 60% and 70% of revenues, with the remainder coming from Falcon business jets. Each Rafale contract benefits the entire French industrial ecosystem, including partners such as Thales and Safran.

Kongsberg Gruppen: A lesser-known Norwegian company, Kongsberg specializes in marine propulsion systems, with 30% of its business dedicated to weapons control systems. In particular, it supplies equipment for the American F-35 and various air defense systems.

Leonardo: formerly known as Finmeccanica, Leonardo is a pillar of the Italian defense industry. The group is involved in various sectors, including helicopters via AgustaWestland, military aeronautics and defense electronics systems. Leonardo generates 30% of its revenues in the United States.

Saab: a diversified Swedish group, Saab is renowned for its Gripen fighter aircraft, appreciated for its cost-effectiveness. The company is also renowned for its electronic systems, such as the GlobalEye airborne surveillance system. Saab generates 42% of its sales in Sweden and 23% in the rest of Europe.

QinetiQ: A former British defense laboratory, QinetiQ maintains close links with the UK Ministry of Defense, which accounts for around three-quarters of its revenues. The company also offers international engineering services.

Hensoldt: Specializing in radars, Hensoldt is a former Airbus subsidiary with a strong presence in Germany, where the French state holds a 25.1% stake. Leonardo also holds a 25.1% stake in the company. Hensoldt has recently experienced strong growth, reflecting its sensitivity to developments in the defense sector.

Chemring: the British group is a specialist in electronic countermeasure equipment for military aircraft and weapons systems, and in electronic components for defense. Since 2021, sales have been growing steadily and should enable the company to return to double-digit margins.