Europe Is Spending Big on Defense. Rheinmetall Benefits.

Rheinmetall is a key part in delivering munitions materiel and other defense equipment in Europe. (Jose Sarmento Matos/Bloomberg)

Germany-based defense company Rheinmetall’s stock has soared over the past few years and appears pricey. At the same time, investors seem to be optimistic for a further rally over the next 12 months.

“Germany is the linchpin to Europe’s rearmament,” says Otto Svendsen, an associate fellow at the Center for Strategic and International Studies. Düsseldorf-based Rheinmetall, which has a market cap of around 78 billion euros ($90 billion), plays a key role in delivering the munitions materiel and other defense equipment.

Despite being the largest economy in Europe, and enjoying years of massive budget surplus, Germany didn’t fulfill its NATO commitment of spending of at least 2% of GDP a year from 1992 through 2023, according to World Bank data.

Since the 2022 Russian invasion of Ukraine, Europe has played catch-up on an epic scale, with military spending estimated at a total of €800 billion from 2025 through 2028.

That promise of more rearmament spending is reflected in Rheinmetall’s share price.

The stock delivered returns of 183% so far this year through Nov. 11, according to Morningstar data. Morningstar also forecasts the stock rallying from its recent price of €1,750 a share to a fair value of €2,220, a 27% increase, excluding dividends. That is more or less in line with the consensus target price of €2,174 within 12 months.

“We’ve seen an increased demand for ammunition across the globe, and there are no signs that will slow,” says Ben Kesling, the business development leader at Chariot Defense, a Silicon Valley–based defense company, and a former U.S. Marine infantry officer. “They will constantly be producing those items.” That’s because bullets, bombs, missiles, rockets, and the like typically don’t get used twice.

“NATO isn’t the only defense customer,” Kesling says. European Union member states of Permanent Structured Cooperation, or Pesco, that collaborate on defense, are also involved in defense planning. The U.S. isn’t involved, he says. In addition to demand from NATO and Pesco for war-fighting necessities, there is also demand for defense materiel in North Africa.

While the price rally is impressive, the stock is trading at an exceptionally high price/earnings ratio of 92. That’s way above the recent 37 P/E ratio for the tech-heavy Nasdaq Composite index, which some experts say is unsustainable.

In some ways, Rheinmetall isn’t like most stocks. Most defense companies respond to government military spending, but it’s also true that governments tend to move slowly. “Defense budgets often come along after the demand is identified, Kesling says. “And it takes a while to get manufacturers to come fully operating.” Remember, until relatively recently, the EU hadn’t produced the vast quantities of war materiel for a long time.

There are some likely challenges for any defense company operating in Europe. Each country—and there are 27 in the EU—has its own idea of what defense equipment to buy, Svendsen says.

Additionally, the estimated increase in military spending may not materialize. “We should keep our eyes on the extent to which these spending announcements are realized,” Svendsen says. In other words, if the big ramp-up in Europe’s military spending doesn’t come to pass, then perhaps profits won’t be as big as expected.

There are risks to investing in Rheinmetall. Governments might not be able to spend as much as they expect. For instance, a significant economic slump in the countries where Rheinmetall’s customers are based may lead to tightened defense budgets. Peace could also break out, making military spending less important. But that seems doubtful.

On balance, taking a risk seems like a good bet. B