European defense stocks extended losses on Thursday, as investors continued to re-evaluate bets on a rise in European rearmament after Germany scrapped a large-scale warship program.
Rheinmetall he fell again with his peers, including Hensoldt again Rankand he stepped back.
Berlin’s U-turn on the F126 program, which would have cost more than 12 billion euros with Rheinmetall expected to be the lead contractor, now presents a significant risk to Europe’s defense trade.
“These stories remind us of that [governments] they can and will change their minds,” JP Morgan analysts led by David Perry said on Wednesday.
Shares in Rheinmetall fell 1% following an 18% drop on Wednesday. German peers Hensoldt and Renk fell 3.5% and 1.7% respectively, and followed losses in the previous session.
Rheinmetall, Henk and Hensoldt share a year to date.
Most of Europe’s leading defense companies were in the red on Thursday morning, extending Wednesday’s losses. Only Saab and Rolls-Royce gained, each less than 1%.
Why the F126 decision is important for defense stocks
The cancellation of the F126 emphasized to the market that, although defense spending may have driven the sector’s rally in recent years, government purchases are still political, unpredictable, and subject to changing military priorities.
Perry noted a major difference between the defense sector and other sectors: private government clients, whose financial priorities are changing.
“We are absolutely certain that Germany will spend a lot of money on defense in the next 5+ years and that it will buy a large amount of world vehicles and ammunition. [Rheinmetall].”
But JPMorgan analysts also did not rule out that governments may buy fewer cars and ammunition than currently expected because they decide to reinvest in other areas, such as drones, space, or advanced air defense systems.
“The decision to cancel F126 is a reminder that some of RHM’s assumptions about its businesses may turn out to be wrong,” Perry’s team said.
Germany announced on Wednesday that it will buy eight small Meko A-200 frigates from Germany’s TKMS, instead of six large F126 frigates, citing major project delays, cost increases, and risks associated with changing the prime contractor to Rheinmetall.
The Meko frigates “will be able to fulfill the German Navy’s main mission of anti-submarine warfare – and, in addition, to meet our NATO obligations,” the country’s government said in a statement on Wednesday.
Last year, NATO allies agreed to increase defense spending from 2% to 5% of GDP by 2025 after years of pressure from Washington.
There has been growing concern among investors that the big budget, promised by European countries and the G7 to comply with NATO goals, will not be fulfilled, and that corporate growth will be hindered as a result, Morningstar Chief Market Strategist Michael Field told CNBC on Tuesday.
In ten years, countries like Germany will probably still put the weapons that were given to Ukraine, added Field, saying that “the market is not there” that the spending is not dependent on “the end of one war or the beginning.”
Rheinmetall silver line
Several equities analysts have cut earnings expectations and lowered their price targets for Rheinmetall.
Analysts at Jefferies cut their price target by 31% to 1,300 euros as they lowered expectations for its 2030 cash profit target, noting that the market cap ended by Wednesday’s decline – more than 10 billion euros – far exceeded the value of the lost contract profit.
“Recovering self-confidence will come with the things that are being looked at the most,” they said. “Rheinmetall will face a difficult task to restore communications credibility after this clear blow to its expectations for the imminent F126 order.”
However, they have maintained a buy rating on the stock, saying that speculation is now being discredited.
JP Morgan said the silver lining for Rheinmetall is that, ultimately, losing the F126 contract would be a good thing, as building warships is “very difficult.”
