Rheinmetall, a company with a wide economic moat, generates 80% of its revenue from the defense sector, boasting a portfolio that aligns closely with NATO priorities, particularly in artillery, armored vehicles, and air defense. It is recognized as the world's largest fully vertically integrated ammunition producer. The rise in global security threats is driving growth in the defense market, especially in Europe, where military budgets have historically lagged since the Cold War.
In light of increasing geopolitical tensions, potential U.S. disengagement, and pressure from Washington, we anticipate that European defense spending will increase from 2.2% of GDP to 3.1% by 2029, and further to 3.5% by 2032. NATO is expected to formalize a new defense spending target in June, with indications suggesting a range of 3% to 3.5% of GDP by 2030. Additionally, EU proposals to relax fiscal rules and unlock up to EUR 800 billion in funding could enable participating countries to elevate defense spending to 3.5% of GDP by 2029.
This evolving landscape presents a significant opportunity for Rheinmetall, given its well-diversified geographical presence and product offerings. As Germany's leading defense contractor, Rheinmetall is poised to benefit from a substantial shift in Germany's defense spending, following parliamentary approval of a proposal to exempt defense spending above 1% of GDP from debt limits, effectively eliminating any cap on future military budgets. We project that Germany’s defense spending will reach 3.5% by 2029-30, averaging around 3% in the midterm.
The company's weapons and ammunition division is expected to see continued sales growth due to the ongoing Russia-Ukraine conflict and the necessity to build stockpiles for Ukraine and NATO allies in anticipation of a ceasefire. Rheinmetall aims to ramp up production from 100,000 rounds in 2022 to 1,100,000 by 2027, with the potential to double this target if needed. Furthermore, Rheinmetall's electronics division is anticipated to expand, driven by its involvement in German military digitization and NATO's European Sky Shield Initiative.
Beyond Europe, Rheinmetall is strengthening its presence in Australia and expanding its operations in the U.S. The Lynx infantry fighting vehicle is a contender in the U.S. XM30 combat vehicle program, which aims to replace approximately 3,800 M2 Bradleys.
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