European defense shares, particularly those of Rheinmetall, Hensoldt, and Renk, experienced significant losses following Germany's decision to scrap the F126 naval program, which was projected to be worth over 12 billion euros. This decision underscores the inherent risks in defense contracts, as government priorities can shift unexpectedly.
JP Morgan analysts noted that while Germany is expected to increase defense spending over the next five years, there is uncertainty regarding the allocation of funds, which could impact the volume of purchases from companies like Rheinmetall. The cancellation was attributed to project delays and cost overruns, with Germany opting instead for smaller Meko A-200 frigates.
Analysts have responded by lowering revenue expectations and price targets for Rheinmetall, with Jefferies cutting its target by 31% to 1,300 euros. Despite the negative outlook, some analysts maintain a Buy rating, suggesting that the loss of the F126 contract may ultimately benefit Rheinmetall by allowing it to avoid the complexities associated with warship construction