BREAKINGVIEWS-Tank maker’s surge depends on political air cover

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Liam Proud

LONDON, Feb 18 (Reuters Breakingviews) - Will European governments muster the resources to defend themselves? That’s what investors in Rheinmetall RHMG.DE are betting. Shares in the $43 billion German weapons maker, known for its Leopard tanks and Skyranger air defence turrets, have doubled since Donald Trump won the U.S. presidential election in November. He wants leaders from Paris to Berlin to raise defence spending beyond the NATO-recommended level of 2% of GDP. To justify the recent surge, everything must go right for Rheinmetall CEO Armin Papperger.

The Düsseldorf-based company, which supplies everything from artillery shells to battlefield software, will clearly benefit if the bloc’s governments pour more money into their militaries, as the region’s leaders pledged to do after a gathering in Paris on Monday. It helps that European Commission President Ursula von der Leyen proposed last week exempting defence spending from the bloc’s rules designed to limit government deficits, effectively giving the green light from Brussels for a splurge on Rheinmetall’s catalogue of howitzers and armoured trucks. Shareholders have been anticipating the spending gusher: the shares are up 1,000% in the past four years, even outperforming U.S. chip darling Nvidia NVDA.O.

It’s possible to see how Papperger could live up to investors’ expectations. According to NATO, the alliance’s European members, including the United Kingdom and Turkey, collectively spent $480 billion on defence in 2024, or 2.1% of GDP. Raising that to 3% would add an extra $210 billion per year. If a third of that increase goes on procurement, in line with the overall ratio last year, that would imply $70 billion of new annual equipment spending up for grabs.

To double Rheinmetall’s 2024 revenue, in line with the increase in its market value since the U.S. election, the group would have to grab 15% of the extra military investment. That’s far greater than its 3% implied share of the total last year, based on comparing analysts’ estimates of Papperger’s 2024 European revenue and the size of procurement budgets in the region. The upshot is that Rheinmetall shareholders are anticipating both a surge in government spending and a larger chunk of it flowing to the German company.

Either could go wrong. State budgets are stretched, especially in Paris and London – historically the region’s two biggest military players. Meanwhile, U.S. suppliers often make superior military kit like sophisticated missiles and drones, implying that European governments might send much of the increased spending overseas. In other words, Rheinmetall’s surge depends on heavy political air cover.

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CONTEXT NEWS

Shares in German military supplier Rheinmetall rose 14% on February 17 and a further 2% as of 1051 GMT on February 18, contributing to a 103% rise since November 4 – the day before U.S. President Donald Trump’s election win.

U.S. and Russian officials met on February 18 in Saudi Arabia for talks designed to help find an end to the Ukraine war.

European leaders met in Paris on February 17 to discuss the region’s response to those talks and pledged higher spending to ramp up the continent’s defence capabilities.

European Commission President Ursula von der Leyen, on February 14, proposed exempting defence spending from bloc-wide rules designed to limit government deficits. The so-called escape clause in theory allows European countries to invest more in military equipment.