Stifel aggressively raises its Rheinmetall stock target on new NATO targets

Investing.com -- Stifel in a note dated Monday has raised its price target for Rheinmetall (ETR:RHMG), citing the potential for a surge in defense spending across NATO member states. 

The brokerage now sees Rheinmetall shares reaching €1,037, up from its previous target of €650, representing a 26.9% upside from the stock's latest closing price of €817. 

The increase follows expectations that NATO will soon raise its defense spending target from the current 2% of GDP to between 2.5% and 3%, potentially unlocking billions in additional military expenditures across Europe.

The revision comes amid mounting pressure from the United States for European countries to strengthen their defense capabilities. 

At the Munich Security Conference, European Commission President Ursula von der Leyen and German Chancellor Olaf Scholz both signaled that military spending could be increased beyond 3% of GDP. 

The European Commission is also considering an escape clause that would exclude defense-related expenditures from EU budget deficit calculations, a move that could allow governments greater financial flexibility to boost military investments.

Stifel analysts believe that a new NATO spending target of 2.5-3% could result in an annual increase of $85-176 billion in European defense expenditures alone. 

Given its dominant position in the land systems sector, Rheinmetall is expected to be a primary beneficiary of this shift. 

Analysts estimate that additional orders from Germany alone could range between €10-20 billion per year, which is comparable to Rheinmetall's full-year revenue guidance of €20 billion for 2027.

The company’s shares have surged 116.6% over the past year, reflecting growing investor confidence in the European defense sector. 

Despite this, Stifel believes the full impact of increased NATO spending targets has not yet been factored into Rheinmetall’s valuation. 

With the company currently trading at 13x estimated 2026 adjusted EBIT, the brokerage argues that the stock remains attractive, particularly in light of the potential for further order inflows and revenue growth.

In addition to higher defense spending expectations, Rheinmetall stands to benefit from the urgent need to replenish depleted ammunition stockpiles across NATO countries, many of which have been supplying weapons to Ukraine. 

The German-based company, a major provider of armored vehicles, ammunition, and air defense systems, has already seen a significant increase in order backlogs, and analysts suggest that further contract wins could be announced later this year.

While Stifel remains bullish on Rheinmetall, it does highlight some risks, including potential delays in international defense procurement processes, regulatory hurdles, and fluctuations in government budgets. 

However, with a combination of strong medium-term guidance and the prospect of further NATO-driven spending increases, the brokerage maintains a ‘buy’ rating on the stock.