Rheinmetall’s Dual Challenge: A Wall Street Downgrade Meets a 20 Billion Euro Order Target

Rheinmetall stock falls 25% YTD as Morgan Stanley downgrades to equal-weight at Berlin air show, citing execution risks despite firm's pivot to pure-play defense contractor.

Morgan Stanley’s decision to lower its rating on Rheinmetall to “equal-weight” could hardly have been timed more awkwardly. The US bank’s downgrade landed on the opening day of the ILA Berlin air show, where the Düsseldorf-based group was unveiling its new identity as a pure-play defence contractor. The cut also dragged down sector peers Hensoldt and Renk, underlining a broader shift in institutional sentiment from euphoria to caution over operational execution risks.

Rheinmetall used its 840-square-metre exhibition stand at the Berlin show to signal a decisive break with its past. The company is no longer content to be known primarily as a maker of tanks and artillery shells. Instead, management is positioning the group as an integrated systems house spanning land, air and space. The showcase highlights included the autonomous MQ-28 Ghost Bat combat drone, developed jointly with Boeing and adapted for the Bundeswehr with procurement scheduled to run until 2029, and a joint venture with ICEYE that is building a satellite network to deliver weather-independent real?time imagery for NATO’s eastern flank. There was also the FV?014 loitering munition, a weapon that sits at the intersection of drones and artillery.

The stock, however, has been unmoved by the technological offensive. Shares traded between €1,203 and €1,211 on the day of the downgrade, leaving them down roughly 25 percent since the start of the year. That puts the equity more than €800 below the 52?week high of €1,988 touched in September 2025. The current price is about 10 percent below the 50?day moving average and far under the 200?day line of approximately €1,617. At a price-to-earnings ratio of around 32, the valuation demands a convincing growth narrative – and Morgan Stanley is not yet persuaded.

Rheinmetall’s transformation took a formal step forward in early June with the signing of a deal to sell its Power Systems division to the Munich?based industrial group Aequita. The transaction, which still requires regulatory approval, is expected to close in the fourth quarter. It removes the last civil?industrial legacy from the balance sheet, leaving the group entirely dependent on high?margin defence contracts – and therefore on the reliability of government defence budgets.

That dependence makes execution all the more critical. Chief executive Armin Papperger has stuck to his full?year guidance after first?quarter revenues fell short of analyst forecasts. The company is counting on a massive second half: the management expects new orders of more than €20 billion in the second quarter alone and sees a potential pipeline of €60 billion for the second half of the year, drawn from large programmes in Romania, Italy and Ukraine. The overall order backlog already stands at around €73 billion.

Yet the market wants to see tangible proof that the production ramp?up can keep pace with demand. The formal completion of the Power Systems sale is still pending, and the next hard test comes in August 2026, when Rheinmetall publishes its second?quarter results. Until then, the company must demonstrate that its shift from a diversified industrial group to a focused defence system house can justify a P/E multiple that sceptics still consider stretched.