Rheinmetall's €300m Drone Deal and €5.5bn Naval Backlog Fail to Impress as €285m Cash Drain and Dividend Ex-Day Weigh

Defence group's ambitious expansion into drones and naval yards fails to lift shares as cash flow concerns and missed earnings estimates weigh on investor sentiment.

The chasm between boardroom ambition and investor sentiment at Rheinmetall has grown cavernous. Chief executive Armin Papperger is driving the defence group into new frontiers — repurposing a former auto parts plant for drone production, pursuing a major naval yard acquisition and posting double-digit earnings growth — yet the stock continues to sink. On Tuesday, shares touched a 52-week low of €1,164.60, closing at €1,162.40, and have now lost 27.42% since the start of the year. The distance to the 200-day moving average has stretched to 30.05%.

Operationally, momentum is unmistakable. Rheinmetall is converting a former automotive supplier site in Neuss into a factory for the FV-014 loitering munition, a system capable of flying up to 100 kilometres and loitering for more than an hour. The German military has signed a framework contract worth roughly €300 million, with initial deliveries pencilled in for next year. In parallel, the group has submitted a non-binding offer for German Naval Yards Kiel, aiming to forge a national maritime champion that would directly challenge ThyssenKrupp Marine Systems. The marine division generated €77 million in first-quarter revenue at a 10% margin, sitting on an order backlog of €5.5 billion.

First-quarter group revenue rose 8% to €1.94 billion, while operating profit advanced 17% to €224 million. The operating margin improved to 11.6%. But investors saw cracks: sales fell about €300 million short of consensus estimates, and operating profit also missed analyst forecasts. More troubling was the free cash flow, which swung to minus €285 million, weighed down by heavy capital spending and lower customer advances. That strain is particularly acute for a company that must convert its record order book into cash flow promptly.

Compounding the anxiety, the stock went ex-dividend on Wednesday. The proposed payout of €11.50 per share — up from €8.10 last year and scheduled for distribution on 15 May 2026 — should have been a positive signal. Instead, it was absorbed into a broader sell-off that has seen the stock lose 18.94% in just seven trading sessions.

Management is sticking to its full-year guidance: revenue between €14.0 billion and €14.5 billion and an operating margin of roughly 19%. Papperger expects a pronounced acceleration in the second quarter as delayed deliveries from the first three months are cleared. Additional catalysts include the planned joint venture with ICEYE to manufacture SAR satellites and the €1.7 billion SPOCK-1 contract. The group is also showcasing its Lynx infantry fighting vehicle and mobile air-defence systems at the BSDA defence fair in Bucharest, hoping to land orders in Eastern Europe that could help the stock find a floor.

Yet the market remains unconvinced. JPMorgan has downgraded the stock from Overweight to Neutral, citing execution and product portfolio risks. Warburg analyst Christian Cohrs slashed his price target to €1,550 from €1,700. The average analyst target still stands at €2,011 — roughly 63% above current levels — but that gap reflects less optimism than a simple challenge for the board to prove itself. At the annual general meeting, the umbrella organisation of critical shareholders even moved to deny Papperger's board discharge for 2025, citing objections to the group's strategy and arms deliveries to countries with questionable human rights records.

The dividend, in nominal terms, is generous. But with cash flow strained and the stock plumbing new depths, it offers cold comfort. The real test will come in the current quarter: if Rheinmetall can accelerate deliveries and convince investors that its sprawling expansion — from drones and satellites to warships — will translate into sustainable returns, the share price may finally bottom out. Without that inflection, the disconnect between a company building the future and a market punishing the present will only widen.