Rheinmetall under huge pressure despite possible HIMARS production in Germany 📉

The shares of German armaments giant Rheinmetall (RHM.DE) are losing more than 7% today, i.e. the most among large German companies, and were unable to sustain the bullish momentum caused by the agreement on tank deliveries to Ukraine and optimistic comments by CEO Armin Papperger. However, in the coming weeks, there may be further catalysts to encourage speculation in the company's shares:

Papperger pushes for HIMARS in Germany

• Reuters reports that a meeting between the company's CEO Papperger and Germany's new Defense Minister Boris Pistorius is expected to take place in the coming days on arms purchases and increased supplies in the face of shortages in the German and other European armies warehouses;
• Rheinmetall is in talks with Lockheed Martin (LMT.US), the U.S. giant that makes the HIMARS rocket launchers used in Ukraine. Papperger indicated that during the Munich Security Conference, which is held every year in mid-February, the company hopes to conclude a deal with Lockheed that will enable HIMARS production in Germany;
• According to the chairman, the company can produce 240,000 rounds of 120mm gun ammunition a year, or 'more than the entire world needs,' and the capacity to produce 155mm artillery rounds could be increased to as many as 500,000 a year, which would make it the world's largest producer of both types of ammunition. Papperger indicated that production capacity could be increased immediately, with the new production line starting in the middle of this year. .

Profits to be shared?

• UBS analysts claims that the positive scenario for the company is potentially already largely reflected in its valuation. According to their estimates, if Rheinmetall ultimately shipped 100 Leopard II tanks to Ukraine, the additional profit from the sale of ammunition and parts could amount to about $1.4 billion. Assuming a 25% margin, this would yield an EBIT of around €350 million. However, according to UBS, these forecasts may prove to be too optimistic as there are other manufacturers of Leopard ammunition;
• At the same time, analysts at Stifel Research pointed out that Leopards are produced in cooperation with another German giant, the unlisted Kraus-Maffei Wegmann (by which the margins, if any, are likely to be split). However, analysts still see Rheinmetall as the only approved supplier of ammunition for the Leopards and manufacturer of the 120mm tank gun against which there is already considerable potential for additional profits and ammunition sales.

Rheinmetall shares (RHM.DE), H4 interval. Demand has retreated from levels above $230 for the third time in a row, which could indicate a prolonged weakening of sentiment if no concrete catalysts friendly to the company's high production capabilities emerge. The price is approaching a test of the SMA 100 (black line) although a key short-term level worth watching may be at €195 per share where the 23.6 Fibonacci retracement of the upward wave started in November 2021 and the SMA200 (red line) runs. Source: xStation5