Rheinmetall’s Rollercoaster Ride: Overvaluation, Profit-Taking, and the Defense Sector’s Crossroads

The defense sector, once a beacon of stability amid geopolitical turmoil, has hit a wall. Shares of German defense giants Rheinmetall, Renk, and Hensoldt—all beneficiaries of Europe’s post-Ukraine war military spending boom—have faced sharp declines in early 2025, raising questions about whether the sector’s valuation has outpaced reality.

A Year of Extremes
Rheinmetall’s stock, up over 100% year-to-date by early 2025, plummeted 6.3% on the day following Germany’s approval of a landmark fiscal package allowing increased defense spending. This “sell-on-good-news” reaction highlighted investor skepticism about the timing of contract delivery. Meanwhile, Renk and Hensoldt saw steeper drops of 10% and 8.5%, respectively, underscoring sector-wide volatility.

The Overvaluation Factor
Analysts point to stretched valuations as a primary culprit. By early 2025, Rheinmetall’s P/E ratio had soared to 51x expected earnings, far above its historical average of 18.4x. Exane BNP Paribas warned that a reversion to historical norms could slash the stock to €800—a 40% drop from its peak. Renk and Hensoldt faced similar scrutiny: both traded at 95% above their 200-day moving averages, with P/E ratios exceeding 40x for Hensoldt and 35x for Renk.

Profit-Taking and Sector Rotation
Investors rotated capital into undervalued sectors amid rising global interest rates and China’s economic slowdown. The European defense index fell 3% in April 2025—the largest drop since 2023—as traders rebalanced portfolios. Goldman Sachs noted defense stocks now traded at a 45% premium to broader markets, versus a historical discount of 10%, creating “more downside than upside risk.”

Operational and Geopolitical Hurdles
Rheinmetall’s delays in converting €55 billion in framework agreements into firm contracts have dampened near-term optimism. CEO Armin Papperger admitted it could take months for Germany’s new fiscal rules to translate into revenue. Meanwhile, Renk’s surge—a 50% rally fueled by retail investor short squeezes—clashed with its reliance on volatile geopolitical spending timelines.

Hensoldt, despite reporting a record €6.9 billion order backlog in Q1 2025, saw its shares stall after a 5% initial jump, as investors questioned its ability to sustain margins. Its adjusted EBITDA fell to €30 million in Q1 (down from €33 million in 2024), a sign that scaling up production strains profitability.

The Bigger Picture: Defense Spending and Valuation
Europe’s defense budgets are projected to hit 3.5% of GDP by 2032, but execution risks loom large. The election of Germany’s Friedrich Merz, who pledged a trillion-euro defense investment plan, has yet to translate into actionable contracts. Analysts like Morgan Stanley caution that even with strong fundamentals, overvaluation risks could trigger a “defense bubble” pop if geopolitical tensions ease.

Conclusion: A Sector in Transition
The declines of Rheinmetall, Renk, and Hensoldt reflect a defense sector at a crossroads. While long-term demand remains robust—driven by NATO’s 2% spending target and Russia’s aggression—the path to profitability is fraught with execution risks and valuation pitfalls.

• Rheinmetall, with its €9.75 billion in 2024 sales and 11.5% defense margins, still holds the strongest hand. But its P/E ratio of 51x demands a correction.
• Hensoldt’s backlog growth (up 18% year-on-year) and revised €6 billion 2030 revenue target suggest resilience, provided it can boost margins.
• Renk, reliant on speculative retail momentum, faces the steepest challenges unless it secures concrete defense contracts.

Investors should focus on companies with secured backlogs (like Hensoldt) and diversified revenue streams (e.g., Rheinmetall’s joint venture with Lockheed Martin). The sector’s true potential lies in its strategic necessity—but only if valuations align with reality.

As one analyst quipped: “Defense stocks are no longer a buy-and-hold story. They’re now about timing the geopolitical cycle—and avoiding the overvalued traps.”