Bernstein Upgrades Rheinmetall to Outperform Amid Valuation Dip

Rheinmetall AG's shares are now trading near what one prominent analyst described as a bear case, according to a recent note from Bernstein. The firm, led by analyst Adrien Rabier, said the recent 20% correction in the stock has priced in an overly pessimistic scenario, making the stock attractive for investors seeking value amid uncertainty according to Bernstein. Despite remaining cautious, Rabier upgraded the stock to "outperform," highlighting what he called an "extraordinary company at an ordinary valuation" according to Bernstein.

The move comes as European defense stocks face renewed pressure following speculation about a potential peace plan for the Ukraine war. Defense shares, which had driven much of Europe's equity gains this year, have seen a sharp decline in recent weeks according to Bloomberg. A Goldman Sachs defense basket is now down about 19% from its early October peak, reflecting the broader sector's sensitivity to geopolitical developments according to Bloomberg.

Germany's military spending plans, however, remain robust. Lawmakers are expected to approve a record €52 billion in military contracts next week, signaling continued support for the country's rearmament strategy according to Bloomberg. For Rheinmetall, which is central to Berlin's defense ambitions, this could represent a significant tailwind. The company is expected to benefit from increased demand for armored vehicles, artillery, and ammunition as Germany aims to build the strongest army in Europe according to Bloomberg.

How Markets Reacted

Rheinmetall's shares rose as much as 1.5% following the upgrade from Bernstein according to Bloomberg. The firm now holds 25 buy-or-equivalent ratings, with three holds and no sells remaining, according to Bloomberg. The upgrade has come as a relief for investors who have watched the stock fall sharply amid fears of a potential cease-fire in Ukraine, which could reduce short-term demand for military equipment according to Investing.com. The stock had previously been seen as "priced for perfection," according to Bernstein, due to its heavy exposure to European defense budgets and its role in supplying Ukraine. While Rabier remains cautious about near-term risks, including potential shifts in funding for ground combat systems and competitive pricing in the ammunition market, he emphasized that the company's long-term growth prospects remain intact according to Investing.com.

Rheinmetall's leadership is pushing for a potential merger with rival KNDS NV, a move that could consolidate Europe's fragmented tank industry according to Bloomberg. CEO Armin Papperger has been engaging with German politicians and KfW, the state-backed development bank, to explore options for increasing Rheinmetall's stake in KNDS according to Bloomberg. The German unit of KNDS, formerly known as Krauss-Maffei Wegmann, is seen as a key asset in the proposed deal according to Bloomberg.

Rheinmetall's shares, however, have faced headwinds due to the uncertainty surrounding the KNDS merger and potential resistance from the French government, which owns half of the company according to Bloomberg. A planned IPO for KNDS could also complicate Rheinmetall's efforts to strengthen its position in the European defense market according to Bloomberg.

What Analysts Are Watching

Rabier and his team remain focused on Germany's rearmament plans, which they see as a central driver for Rheinmetall's long-term growth according to Investing.com. They estimated that the company's sales could reach €42 billion by 2030, slightly below its own target of €50 billion according to Investing.com. Operating margin guidance was also revised downward, from over 20% to 18.5%, according to Investing.com, reflecting ongoing competitive pressures.

Despite these adjustments, the analysts believe that Rheinmetall is well positioned to capture a significant share of the European defense market, particularly as governments across the continent continue to boost military budgets according to Bloomberg. The firm's recent order for tank ammunition worth several hundred million euros from the German armed forces further supports this view according to Marketscreener.

As the European defense sector continues to evolve, investors will be closely watching for signs of consolidation, regulatory developments, and shifts in defense spending patterns. For now, the upgrade from Bernstein offers a vote of confidence in what remains a high-growth but high-risk space.