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As the Russo-Ukrainian conflict continues, many European nations have sharply increased defense spending, especially on artillery, munitions, air defense, and modernization of ground forces. Germany, for instance, has committed to raising defense spending from around 1.6% of its GDP to nearly 3.5% by 2035. This provides strong impetus to the likes of Rheinmetall AG (ticker: RHM), a leading German defense systems manufacturer which is well-positioned in the production of artillery ammunition, munitions, tanks, infantry fighting vehicles, and other land systems.
Strengthening Europe’s Defense ArsenalRheinmetall’s core business is the manufacturing of munitions, which is ramping up significantly with a goal of producing 1.1 million 155 mm rounds per year goal by 2027. Central to this is a €8.5 billion contract with Germany for 155 mm artillery shells, with a new ammunition facility in Lithuania (Rheinmetall Defence Lietuva) scheduled to come online in 2026.
The company’s “Electronic Solutions” division is growing fast, providing cutting-edge solutions in communications, digitalization, soldier systems, air defense systems, and simulation technologies. Joint ventures and partnerships are being pursued for the development of drones, autonomy, air defense, and satellite technology. This division has positioned Rheinmetall as a significant player not just in hardware but in the high-tech modernization of military systems, catering to the increasing demand for advanced digital and electronic defense capabilities.
Furthermore, Rheinmetall is deeply involved in NATO’s defense initiatives, particularly in the provision of critical artillery systems and ammunition. As NATO members boost their defense budgets, Rheinmetall stands to benefit from increased cooperation and supply opportunities within the alliance.
Rheinmetall exists in an environment wherein both investment and cost of goods tend to be quite high. In FY 2024, this meant a net income that was a little under 8% of total revenue earned that year.
However, high investments do often pay off: the company has built up large order backlogs, often on the back of multi-year framework agreements. More framework contracts in soldier systems, platform-based communications, air defence, drone/unmanned systems can be expected while increased demand for long range precision munitions (which is trend seen across the world) could potentially benefit Rheinmetall’s ammunition technology segments. In the future more contracts will likely be floated by various countries to explore the potential for autonomous ground systems, battlefield electronics, cyber/defense software, and advanced sensors. Further orders from European countries, especially as national defense budgets rise and countries aim for more self sufficiency, will add to the order queue.
Peers, Risks and ConvictionsRheinmetall operates in a competitive European defense landscape alongside other prominent players, such as Leonardo (Italy), BAE Systems (UK), Thales (France), Dassault Aviation (France), and Saab (Sweden). These companies often collaborate through joint ventures or independent projects to expand Europe’s defense capabilities. While this cooperation is beneficial, the companies also face similar risks and challenges:
Revenues are dependent on national governments and military budgets, which are subject to political risk, budget constraints, elections, shifting priorities. If political winds change, demand can drop.
Production depends on raw materials which could be affected by volatility in commodity prices which could, in turn, squeeze margins.
Labour, energy and logistics costs in Europe remain high and could increase further.
Meeting production targets also depends on regulatory approvals, environmental constraints, permitting, and so forth.
Despite these challenges, Rheinmetall’s stock has become a keenly followed ticker among global investors since the outbreak of the war in Ukraine. While the stock might already be priced for high growth, any shortfalls in the form of missed contracts, cost overruns, or slower-than-expected demand could impact its trajectory.
Moreover, as warfare increasingly emphasizes cyber, space, and unmanned systems, demand for traditional hardware could face competition from these emerging technologies. Rheinmetall’s ability to pivot and innovate in the space of autonomous systems, cybersecurity, and digital warfare will determine its future relevance in an evolving battlefield.
That said, Rheinmetall remains a notable stock for professional investors, especially those looking to capitalize on the defense sector’s growth. In this context, the 3x Long Rheinmetall ETP (RHM3) offers professional investors in Europe the potential to gain exposure to Rheinmetall’s upside potential, particularly when confidence in the stock swells and drives its price higher. This product may represent an attractive option for tactical gains, especially when paired with broader market trends in defense and geopolitical instability.
Other similar products in the Leverage Shares catalogue include the ETPs based on Boeing, namely the 3X Long Boeing ETP (BA3) – which also potentially delivers gains during the upsides of Boeing’s stock trajectory – and the -1X Boeing ETP (BAS), which aims to deliver the same impact as holding a short position in Boeing stock without the need to maintain a margin balance.
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