Hey there, bargain hunter.
Two days ago, Rheinmetall fell 18% in a single session. One of its worst days in nearly four decades. The trigger was a report that Germany is scrapping plans to build the F126 frigate — a multi-billion-euro warship program that Rheinmetall was positioned to lead. Berlin will buy eight smaller Meko A-200 frigates instead. No fanfare. No warning.
The rest of the sector didn’t escape clean either.
Here’s what the scoreboard looked like on June 24:
- Rheinmetall (RHM.DE): down 18%
- Renk: down 7.2%
- Hensoldt: down 3.3%
- Leonardo: down 4.7%
- Saab: down 2.8%
And Rheinmetall was already down roughly 30% from its January highs coming into that session. So this wasn’t a healthy pullback on a strong trend. This was a sector already bleeding, then getting hit again.
Here’s the thing — the spending math hasn’t actually changed.
At the 2025 Hague Summit, NATO allies committed to spending 5% of GDP on defense by 2035, structured as at least 3.5% for core military requirements. That’s a doubling of the old 2% Wales benchmark. And for the first time in history, every single NATO ally met or exceeded the 2% spending floor in 2025, with European allies and Canada posting a 20% increase in defense spending year-over-year.
That’s real money. Not a pledge on paper.
Slight tangent, but it matters: the next test of all this political will is the NATO Ankara Summit in July. That’s where allies are supposed to present their national plans for getting to the new targets. The Ankara summit could either validate the bull case or reveal the gap between commitment and delivery.
Back to Rheinmetall. The company’s own guidance called for 40 to 45% sales growth in 2026, and its order backlog stood at €64 billion at the end of 2025. Revenue grew 29% year-over-year. Operating profit hit €1.8 billion. None of that changed because Germany decided to buy smaller frigates. What changed was sentiment — and in a stock that had already run 400% over three years, sentiment does a lot of damage on the way down.
What’s interesting is the divergence happening underneath the surface. European defense stocks broadly are down year-to-date, with the Stoxx Europe Aerospace and Defense index trailing the wider Stoxx 600 by nearly 6 points. But the structural picture — backlogs, order intake, government mandates — keeps pointing the other direction. Analysts are calling this a consolidation phase where investors are getting more selective, demanding actual execution rather than just headline spending numbers.
The stocks that still look interesting on a valuation basis: Thales (P/E of roughly 29, FCF yield near 5%, EPS up over 60% on a trailing basis) and Rheinmetall itself, which Morningstar still rates as undervalued despite the carnage. The overvalued names — Saab, in particular, which was trading significantly above fair value estimates even before this week’s drop — are the ones that still concern me.
There are €800 billion in potential European defense spending headed toward the end of the decade if the 3.5% target holds. Deliveries on recently booked orders are expected to accelerate in 2026 and 2027. The order books are real. The question is whether the stocks have gotten ahead of the delivery timelines — and whether this week’s warship news is a one-off program cut or the first sign that governments are going to get selective about what they actually fund.
Worth watching closely before the Ankara summit lands.
