By Rheinmetall share price has been one of the top gainers in the DAX Index in the past few years, helped by the rising geopolitical challenges that have fueled more defence spending.
It bottomed at €54.95 in 2020 as the pandemic started and then surged to a record high of €1,945. This surge has brought its market capitalization to over €78 billion or $90 billion.
Rheinmetall is closing the valuation gap with some its American peers. For example, Lockheed Martin has a market cap of $110 billion. It has already passed companies like General Dynamics and Northrop Grumman.
Why Rheinmetall share price has surged
Rheinmetall is a German defense contractor that manufactures various items like armored vehicles, artillery, propellants, cannons, and air defense systems for ground, air, and naval forces.
The stock has jumped in the past few years, helped by the growing geopolitical issues. Its stock surged after Russia invaded Ukraine in 2022, leading to high demand for equipment, including artillery.
There are other geopolitical issues, including in the Middle East, where Israel has been battling Hamas and Hezbollah. Tensions between Israel and Iran remain despite the ongoing talks with the United States.
The biggest geopolitical risk will be between the United States and China when the latter invades Taiwan in the next few years. As a result, countries have boosted their spending to prepare for these risks.
Rheinmetall stock price has also jumped because of the recent parliamentary vote in Germany that boosted government spending. Most of these funds will go to defence contractors, of which RHM is the biggest one. Other European companies have also passed similar deals.
Results show a surge in backlog
All these tailwinds have led to strong results and backlog. The most recent results show that Rheinmetall’s sales jumped by 46% in the first three months of the year. This is strong revenue growth that is mostly common among new technology companies.
It made €2.3 billion in sales during the quarter, while its operating result jumped by 49% to €199 million.
Its backlog, the most important metric, jumped to €63 billion, a notable figure since it had a backlog of €38.3 billion in 2023.
The company grew as its vehicle systems sales nearly doubled, while its weapons and ammunition sales hit a record high of €600 million.
It now expects its annual sales to jump by between 25% and 30% this year and its operating result margin to be about 15.5%.
The risk, however, is that Rheinmetall has become highly overvalued as its P/E ratio stands at over 100. While its business is growing, this valuation means that the stock will likely go through some rebalancing as the recent momentum wanes.
Rheinmetall share price analysis
The daily chart shows that the Rheinmetall stock price peaked at €1,940 and has now pulled back to the current €1,700.
A closer look at the stock shows that it has formed a rising wedge pattern, comprising of two ascending and converging trendlines. This convergence has already happened, which explains why it has crashed.
The stock has moved above the 100-day and 200-day Exponential Moving Averages (EMA). It remains 26% above the 100-day EMA and 60% above the 200-day EMA.
Therefore, there is a likelihood that the RHM stock will go through mean reversion, a situation where an asset moves back to the historical average.
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