The global defense industry is a massive and complex sector shaped by geopolitical tensions, technological advancements, and ever-evolving security needs, asserts Glenn Rogers, contributing editor to Internet Wealth Builders.
Within this domain, Rheinmetall AG (RNMBY) and BAE Systems (BAESF) stand out as two major European players with a proven track record of delivering advanced weaponry and defense solutions. In an era where conflicts and instability remain a reality, these companies are well-positioned for growth — making their stocks potentially attractive investments.
Here's why investing in these companies could be a shrewd move for your portfolio.
• Growing defense budgets: Increased global security concerns are driving nations to bolster their defense spending, creating a favorable environment for defense contractors. The war in Ukraine has underscored the importance of national defense, particularly in Europe. NATO member countries have pledged to increase defense spending, with Germany committing to exceeding the 2% of GDP target.
• Modernization programs: The need to replace aging weapons systems and adopt cutting-edge technologies is fueling demand for Rheinmetall's and BAE Systems' products and services.
• Focus on technology: Both companies invest heavily in research and development to stay ahead of the technological curve. This commitment to innovation keeps them relevant in a rapidly changing defense environment.
• Expanding global reach: These companies aren't solely reliant on their domestic markets. They actively pursue opportunities worldwide, providing diversification and potential for long-term growth.
• Diverse portfolios: Their offerings are wide-ranging, spanning land, air, sea, and cyber domains, providing exposure to multiple growth areas.
• Global security outlook: Even beyond the current conflict, the world remains a complex geopolitical landscape. Tensions in the Middle East, the rise of China, and increasing cyber threats generate a persistent need for advanced defense solutions.
Let's take a closer look at each company.
Rheinmetall AG is a German defense giant with roots dating back over a century. Rheinmetall produces an impressive array of military hardware, including tanks, armored vehicles, artillery systems, air defense systems, and a comprehensive range of ammunition.
Its reputation for quality and innovation has resulted in major contracts worldwide. Its notable products include the Leopard 2 main battle tank (used by numerous NATO members), the Boxer armored vehicle, and the cutting-edge Skynex air defense system.
The stock has been rising steadily since September and is trading near its all-time high. The company has experienced significant revenue and profit growth in recent years. This has been driven by increased defense spending globally, major contract wins (like the German Bundeswehr's selection of the Lynx infantry fighting vehicle), and a focus on modernization programs.
Rheinmetall anticipates a significant increase in sales for fiscal year 2024. The company expects to see an improvement in its operating margin, aiming for a range of 14% to 15%. This increase from 2023's margin of 12.8% suggests improved profitability. Action now: Buy with a target of US$130.
BAE Systems is a British multinational defense, aerospace, and security titan. The firm is renowned for designing and manufacturing advanced combat aircraft like the Eurofighter Typhoon and the F-35 Lightning II. Additionally, it develops cutting-edge avionics and electronic systems.
The company also constructs warships, submarines, and naval combat systems, including the Type 26 frigate for the Royal Navy and the Astute-class submarine. BAE possesses a vast global footprint with significant operations in the United States, Australia, and Saudi Arabia. Its focus on technological excellence keeps it at the forefront of defense innovation.
The firm has seen a steady increase in sales and profits. Factors driving growth include high-profile programs like the F-35 fighter jet and the Type 26 frigate. It had a strong operational and financial performance in 2023, with sales reaching £25,284m, marking a 9% increase from the previous year.
Looking ahead, BAE Systems is well-positioned for sustained growth, driven by its global footprint and record order intake. Action now: Buy BAE Systems with a target of US$25.
