Investors are currently underestimating the European defense industry, which has faced challenges such as procurement delays and a potential easing of geopolitical tensions. Following disappointing first-quarter earnings from major defense companies, there are concerns about the sector's future growth after a peak in 2025 driven by increased military spending.
However, Morningstar analyst Loredana Muharremi argues that the market is misinterpreting short-term issues as fundamental changes. Rheinmetall, a key player in the defense sector, has seen its stock drop 26% this year, yet it has appreciated nearly 1,300% over the past five years due to heightened government spending linked to the Ukraine conflict.
Analysts estimate that Rheinmetall could capture at least 20% of Europe's equipment demand, excluding France, and have set a fair value of 2,380 euros ($2,763) for the stock, indicating a potential 91% upside.
Concerns about the company's reliance on traditional artillery and the risk of demand decline if the conflict ends are countered by its strategic focus on lower-risk areas like air defense and naval systems.
The long-term outlook remains positive, driven by multi-year procurement programs, increased NATO spending, and the need to replenish military stockpiles, with restocking ammunition alone representing a significant opportunity over the next decade