Morgan Stanley says Rheinmetall shares could double to €3,000

Investing.com -- Morgan Stanley (NYSE:MS) has raised its price target on Rheinmetall (ETR:RHMG) shares to €2,000 from €1,300 but suggested the stock could also double to €3,000 in its “blue-sky” scenario as European defense spending accelerates.

According to Morgan Stanley, the German defense contractor could see its capacity double by 2030 if European defense spending rises to 3% of GDP. Such an increase in spending would provide a significant tailwind for order intake and framework contracts.

"With capacity set to double should European defense spending rise to 3% of GDP, the shares could also double to €3,000 on our numbers under our scenario analysis," analysts Marie-Ange Riggio and Ross Law wrote in a note.

Rheinmetall has seen growing demand for its land-domain products, with Morgan Stanley estimating that the company has gained around 2% of market share in the past three years.

The Wall Street firm now assumes higher EU defense spending and expects Rheinmetall’s sales market share to catch up with its current order share. This opens “a plausible path to €3,000,” the analysts said.

They acknowledge that their previous assumptions on European defense spending and Rheinmetall’s market share were too conservative.

The analysts now expect equipment spending to account for 50% of total European defense budgets by 2030, up from an earlier estimate of 35%. This shift, combined with limited capacity among U.S. peers, could lead to further market share gains for European players like Rheinmetall.

The company has already increased its share of the European equipment market to 12% in 2024, up from 10% in 2022, and analysts expect this trend to continue.

The report also noted the imminent publication of a European Commission White Paper, which could confirm the increasing allocation toward equipment spending. 

"We believe sales market share should catch up current market shares in orders and assume 25% by 2030," the analysts continued. "That would drive our EPS estimates to almost double, in line with capacity expansion, and valuation could reach €3,000/sh, based on 2030 estimates, in a blue-sky scenario."

Moreover, they highlighted the company’s robust backlog, expecting it to remain at three to five years of sales coverage through 2030.

“Rheinemtall’s scenario based on 3% from 2025 would imply a ~€300bn backlog by 2030, or 5 years of sales coverage,” analysts highlighted. “We note this excludes any acquisition, whereas management has highlighted M&A as a focus for the company.”

Rheinmetall’s financial strength could also support further growth, with Morgan Stanley estimating that the company will have around €7.5 billion in M&A firepower by 2025.

The bank expects a wave of earnings upgrades from the 2025 summer as investors get more clarity on the direction of European defense budgets.