Germany will cut spending on ammunition. Which company will be negatively affected by this?

The German government plans to cut spending on ammunition next year in favor of other defense priorities. This could exacerbate the problems faced by one of the industry’s largest players—Rheinmetall, according to Bloomberg. The defense company’s stock has already lost 30% since the start of the year.

According to the draft budget for 2027, which Bloomberg has reviewed, Germany plans to allocate approximately €9.6 billion ($10.9 billion) for ammunition—down from €11 billion in 2026. The government may still make changes to the budget, the agency notes. Nevertheless, this amount still exceeds the figures for 2025, when Germany began significantly increasing its defense spending and spent a total of less than €4 billion on ammunition purchases, Bloomberg emphasizes.

Germany's total defense spending will rise sharply through 2030, the agency notes. The country's Ministry of Defense told Bloomberg that it could not comment on specific budget items until the budget is approved.

Rheinmetall, which specializes in tanks, artillery, and related ammunition, is losing ground to manufacturers of unmanned technologies following the reallocation of government defense spending, Bloomberg notes. The draft budget is raising new doubts about the investment appeal of traditional defense contractors, the agency notes.

“The preliminary allocation of funds could fuel the ongoing debate over a reevaluation of Germany’s defense spending priorities—in particular, the balance between traditional types of weapons, such as ammunition, and higher-priority areas,” Mediobanca analysts wrote in July in a note cited by Bloomberg.

A basket of European defense stocks compiled by Goldman Sachs has remained virtually unchanged since the start of the year, while the Stoxx Europe 600 index has risen 9.6%. Investors fear that earnings in the sector are not growing fast enough to justify valuations driven by European countries’ promises to increase defense spending, according to Bloomberg. As of February 2022, Rheinmetall’s market capitalization stood at €4.2 billion. It now stands at €49 billion.

Rheinmetall, the world’s largest manufacturer of 155-millimeter artillery shells, had already suffered losses due to its ill-fated acquisition of the shipbuilding company Naval Vessels Lürssen. The asset was acquired when it was considered the most likely new prime contractor for the construction of Germany’s F126 frigates. However, last month the government terminated the contract, causing Rheinmetall’s stock to plummet 19% in a single day. The company announced on July 2 that it will assess the impact of the contract cancellation on its full-year outlook when it reports its second-quarter results on August 6, according to Bloomberg.

In addition, last week China imposed export restrictions on 14 European companies, including Rheinmetall, citing this move as a response to European Union sanctions.

“In the short term, Rheinmetall may have to revise its forecast downward several more times,” Hervé Prétre, head of global investment research at Edmond de Rothschild, told Bloomberg. According to him, investors were “alarmed” by the company’s heavy reliance on traditional ammunition and its acquisition of a shipbuilding company.

“Now even the German government no longer considers tanks and artillery to be the top priority,” said Jens-Peter Rick, an analyst at Mbw Research, who this month downgraded his recommendation on the stock from “buy” to “hold.” “Before upgrading our recommendation, we will wait for further confirmation of what the final budget will look like.”

Although analysts are lowering their price targets for Rheinmetall shares, their ratings remain largely positive. According to brokers tracked by Bloomberg, the company’s stock has 23 “buy” recommendations, four “hold” recommendations, and no “sell” recommendations.

This article was AI-translated and verified by a human editor