Rheinmetall stock falls again after Germany scraps F126 deal
European defense shares extended losses on Thursday, as investors continued to reassess betting on Europe’s rearmament boom after Germany scrapped a flagship naval programme.
Berlin’s U-turn on the F126 program, which could have been worth more than 12 billion euros for which Rheinmetall had been expected to become the lead contractor, is now exposing a key risk to Europe’s defense trade.
“This news reminds us that [governments] can and do change their minds,” JP Morgan analysts led by David Perry said Wednesday.
Shares of Rheinmetall fell 1.8% following a 18% drop on Wednesday. German peers Hensoldt and Renk dropped 6.7% and 2.5% respectively, also following losses in the previous session.
Rheinmetall, Henk and Hensoldt shares in the year-to-date.
Most of Europe’s leading defense companies were in the red on Thursday morning, extending Wednesday’s losses. Only Rolls-Royce made gains, rising less than 1%.
Why the F126 decision matters for defense stocks
The F126 cancellation emphasized to markets that, while defense spending may have driven the sector’s rally in recent years, government procurement remains political, unpredictable, and subject to shifting military priorities.
Perry noted the major difference between the defence sector and other sectors: the customers are essentially always sovereign governments, whose financial priorities change.
“We are absolutely convinced that Germany will spend a lot of money on defence procurement in the next 5+ years and that it will buy significant amount of land vehicles and ammunition from [Rheinmetall].”
But the JPMorgan analysts also didn’t rule out governments may buy fewer vehicles and ammunition than currently expected because they decide to reallocate money to other areas, such as drones, space, or advanced air defense systems.
“The decision to cancel the F126 is a reminder that other assumptions RHM has made for its businesses may prove incorrect,” Perry’s team added.
Germany announced on Wednesday it would instead buy eight smaller Meko A-200 frigates from the German TKMS, instead of the six massive F126 frigates, citing significant project delays, cost increases, and the risks associated with changing the prime contractor to Rheinmetall.
The Meko frigates “would be capable of fulfilling the German Navy’s core mission of anti-submarine warfare—and, by extension, meeting our NATO obligations,” the country’s government said in a statement on Wednesday.
A year ago, 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 budgets, promised by European and G7 countries to keep up with NATO targets, will not materialize, and that companies’ growth will be constrained as a result, Morningstar Chief Market Strategist Michael Field told CNBC on Tuesday.
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