UBS upgrades Rheinmetall to "buy," raises price target to €1,208

Investing.com -- UBS Global Research in a note dated Monday has upgraded its rating on Rheinmetall (ETR:RHMG) to "buy" from "neutral," citing the potential for increased defense spending in Germany and across Europe. 

Shares of the arms manufacturer were up 3.7% at 07:40 ET (12:40 GMT).

The brokerage has also raised its price target for the German defense and automotive company to €1,208 from €924, reflecting expectations of strong revenue growth and higher profitability in the coming years.

The decision to upgrade Rheinmetall follows the conclusion of the German elections, an event that had previously introduced uncertainty regarding defense budget allocations. 

Despite a political landscape that may complicate constitutional changes for increased military spending, UBS analysts believe alternative funding mechanisms—such as invoking emergency escape clauses, reallocating budgets, or introducing tax hikes—could still facilitate a rise in defense expenditure. 

UBS sees potential share price weakness stemming from political hurdles as a buying opportunity, given the structural demand for Rheinmetall’s products in an evolving security landscape.

A key driver of UBS’s revised outlook is Rheinmetall’s strong positioning ahead of NATO’s upcoming capability review. 

The company has already benefited from Germany’s special defense fund, where it holds a 50% market share. However, its growth trajectory is not solely dependent on Germany, as approximately 50% of its 2023 revenue came from other European nations. 

UBS anticipates that Rheinmetall will continue to capture a major share of the expected rise in land-system spending across NATO members, further solidifying its role as a major defense supplier in Europe.

UBS forecasts Rheinmetall’s average annual revenue growth at 26% through 2028, alongside EBIT growth of 34% over the same period. 

While its EBIT estimates for 2024-2026 are slightly above market consensus (by 1-3%), UBS is more optimistic for 2027-2028, projecting figures 8-12% higher than the current consensus estimates. 

The upward revision incorporates Rheinmetall’s latest revenue outlook, which now envisions 2030 sales in the range of €30-40 billion, an increase from its previous target of €30 billion.

UBS analysts outline a potential upside scenario in which Rheinmetall could achieve up to €60 billion in revenues by 2033, assuming continued robust demand and increased defense spending across Europe. 

In this case, UBS estimates a potential share price valuation of €1,685. However, risks remain, including geopolitical shifts, potential constraints on European defense budgets, and competition from U.S. defense firms seeking a foothold in European procurement programs. 

Another challenge is Rheinmetall’s ambitious expansion plans, which would require tripling its revenue between 2024 and 2030—a major operational challenge despite the company’s strong track record.

UBS’s valuation model is based on a sum-of-the-parts approach, with the defense segment now valued at an enterprise value to EBIT multiple of 11.3x for 2030, reflecting pre-war historical averages. 

The model assumes a discounted rate of 9.0% and a target EBIT margin of 20%. The price target of €1,208 underscores the investment bank’s confidence in Rheinmetall’s ability to capitalize on long-term defense spending trends, despite near-term uncertainties.

Rheinmetall’s stock has seen growth over the past few years, reflecting heightened defense demand following geopolitical tensions in Europe. 

As of February 21, the company’s shares were trading at €894.20, within a 52-week range of €414.80 to €932.80. 

The market capitalization stands at €39 billion, with a free float of 100% and average daily trading volume of 312,000 shares.