Stocks Hit New High: “Golden Decade” for Defense Stocks Like Rheinmetall? What the experts advise

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Ukraine needs ammunition, the United States is faltering as a protective power, and the Bundeswehr alone has to invest billions in new equipment. No wonder the defense industry is booming on the stock market. But is it already too late to enter? FOCUS online asked the experts.

Go to Rheinmetall-Chief Armin Papperger, your company will soon supply ammunition to all of Europe. Rheinmetall wants to produce 700,000 artillery shells a year, starting in 2025. “We are in the process of doubling or even tripling our powder capacities at individual locations, such as those needed for the propellant charges of artillery shells,” he said. Papperger to the “Handelsblatt”. ”.

For this purpose, the Unterlüß plant in Lower Saxony will also be expanded. Defense Minister Boris Pistorius and Chancellor Olaf Scholz were present at the opening ceremony on Monday. The clear signal: Europe is arming itself. Not only to continue supporting Ukraine, but also because the United States could no longer be a protecting power if Donald Trump were president again.

Investors also liked Papperger's words and Scholz's visit. Rheinmetall's share recently entered the first stock market league, Dax rose, reached another all-time high of 365.20 euros on Tuesday and recently rose 3.5 percent. It was also uphill for Hensoldt, an Airbus subsidiary that produces, among other things, radars and laser targeting systems. The share price rose a good four percent.

As a result of its rise since the start of the war, the stock, like many other defense industry stocks, has soared to previously unknown heights. Take Rheinmetall for example: for years, the stock had a fairly low-key existence on the MDax., the war industry was considered frowned upon. However, in early 2022, the price literally skyrocketed. Initially it went from a good 85 euros to more than 200 euros, and now even 400 euros seem to be within our reach. More since the beginning of the war: more than 270 percent.

The Dax also recently hit an all-time high, but in the same period it only gained about twelve percent. Some investors are wondering whether the defense stock boom can continue and whether it is still worth getting into.

Ukraine really needs thousands more bullets per day

The fact is that, unfortunately, the capabilities that Rheinmetall is targeting are very much needed. An EU Parliament report from November said Ukraine was firing up to 7,000 artillery shells each day. A Ukrainian parliamentarian told CNN that the country's armed forces actually wanted to fire 10,000 rounds per day.

In total, Ukraine would probably need 1.5 million bales a year, Rheinmetall boss Papperger said at the time. It is not surprising that Rheinmetall wants to push its capabilities to the maximum. The company is not the only producer of this type of bullets. But if you want to supply not only Ukraine, but also Europe as a whole, even the planned 700,000 shells per year still seem little.

And this is just about the ammunition. There is also much to be done in other areas, for example in the tank fleet, especially in the Federal Republic. Papperger is therefore confident about future business prospects. “The 100 billion special funds must first be implemented in projects. That works. When the sum is exhausted, there will have to be a significant increase,” Papperger told the Handelsblatt newspaper.

The manager believes that this will result in an increase in the defense budget or additional special funds. In any case, the trend is clear throughout Europe, as an evaluation by the European Defense Agency shows. In 2022, defense investments by EU countries increased by six percent to a record €240 billion, for the eighth year in a row. Twenty of the 27 EU members increased their defense budgets, six of them by more than ten percent.

In this sense, Rheinmetall & Co. does not have to worry about running out of business in the coming years. Investment experts believe that the price potential has not yet been exhausted.

A “golden decade” for defense actions seems possible

“Based on fundamental analytical considerations, defense stocks remain interesting and not too expensive,” writes David Bienbeck, CEO of Albrech & Cie. Asset management, upon request to FOCUS online. Alexander Reich, asset manager at PVV AG in Essen, even sees the possibility of a “golden decade” for defense stocks like Rheinmetall.

Given the many problem areas globally, the need for security is likely to remain high. However, investors should not only consider German stocks. This is the case of some American defense companies, such as Lockheed Martin. or Northrop Grumman to determine the “actual properties of endurance runners,” says Bienbeck.

The opinion of asset manager Herrmann Ecker from Bayerische Vermögens Management AG is similar. “The Rheinmetall field has already had good results, but it should have more potential. For 2024, the consensus estimates a profit of 19.59 euros per share, which represents a price-earnings ratio of 18.3. Considering the expected growth of an average of 22 percent annually in the coming years, the price does not appear to be overvalued at all.”

Ecker also reminds us of the factor of the presidential elections in the United States: “A renewal of Donald Trump's presidency would probably lead to more or less panicked arms efforts by some European NATO members.” benefitAirbusDassault Aviation or BAE systems benefit.

“European defense policy cannot permanently depend on the United States”

Finally, Chris-Oliver Schickentanz, chief investment strategist at Capitell AG, still sees potential despite the rally. “I am convinced that the issue of weapons will receive special attention among investors, but also in politics, in the coming years. Since Trump's statements over the weekend, it has become clear that European defense policy must be reoriented and cannot permanently depend on his “big brother, the US.”

In the coming years, according to Schickentanz, this will lead to additional investments of around three billion. And European defense companies in particular will benefit from these funds.

However, investors have to decide on two points. On the one hand, Rheinmetall is not a “pure speculator,” as Schickentanz points out. The company has a large non-defense division that investors should not forget. On the other hand, and this question comes up again and again when it comes to defense stocks, investors have to think carefully about whether they want to make money in the death business.

Many of the stock market professionals surveyed by FOCUS online pointed out this aspect despite the new quality of beauty salons in the sector. Markus Zschaber from the asset management company VMZ even put it plainly: “We, as asset managers with 30 years of experience, have clearly decided not to invest in this segment.”

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