RNMBF - Rheinmetall: 2022 Earnings Record Will Likely Be Broken Again This Year

2023-05-31 09:02:01 ET

Summary

• Rheinmetall is a German company with a specific focus on defence-related equipment like tanks and ammunition.
• Needless to say, the company is benefiting from the war in Ukraine.
• 2022 was a record year, but 2023 and 2024 will likely break that record.
• I was too cautious last year and missed out on the stock. That's too bad, but Rheinmetall still isn't very expensive.

Introduction

About nine months ago, I discussed Rheinmetall ( RNMBF ) ( RNMBY ) as the German company was heading towards a record year . Rheinmetall indeed beat the expectations and 2022 was the best year in the history of the company. Not only is that good news for the shareholders, it is also setting the tone for 2023. As other authors have noticed, Rheinmetall may very well benefit from existing and current tailwinds for years to come. As the company has now also released Q1 results, this could be a good moment to revisit my original thesis to see if I need to update my rating after the stock’s recent 60% gains.

Despite the company gaining more traction, the US listing of Rheinmetall is pretty illiquid, so I would strongly recommend to trade in Rheinmetall on the Deutsche Boerse where it is trading with RHM as ticker symbol . The current average daily volume is approximately 270,000 shares per day for a monetary value of in excess of 60M EUR per day. The market capitalization is currently just over 10.6B EUR. I will use the Euro as base currency throughout this article. Unfortunately the corporate website contains several ‘download only’ links but you can find all relevant documentation here .

2022 was indeed a record year

This article is mainly meant as an update to my August 2022 article and I’d like to refer you to that article to get a better understanding of the company’s background and operations.

While 2022 is already behind us, I wanted to spend some time on actually digging through the full-year results as it provides a good starting point to form an opinion on what we can expect for this year.

The company reported a total revenue of 6.4B EUR in 2022 and after including the capitalized items, the reported revenue was 6.56B EUR, a double digit increase from the 5.78B EUR reported in FY 2021. And while the company obviously had to deal with increasing operating expenses as well, the EBIT actually increased by approximately 20% mainly due to two elements: the depreciation and amortization expenses remained stable whereas pretty much all other operating expenses increased by a double digit percentage. Secondly, Rheinmetall reported an ‘other net financial income’. Unfortunately the company did not elaborate on this so I will assume the majority of this additional contribution to the EBIT result was mainly non-recurring in nature.

The bottom line shows a net income of 535M EUR of which 469M EUR was attributable to the shareholders of Rheinmetall. This resulted in an EPS of 10.82 EUR per share, of which 10.64 EUR per share was contributed by the continuing operations. This means Rheinmetall exceeded the 10 EUR per share in EPS I was expecting in my August 2022 article.

2023 is off to a good start and I expect record earnings again

While 2022 was a record year for Rheinmetall, it doesn’t look like the record will be there for much longer as 2023 is shaping up to be even better than 2022. The first quarter of 2023 already confirms this will be a strong year as the total consolidated revenue increased by almost 8% to 1.36B EUR. While that doesn’t sound impressive compared to the 6.4B EUR in revenue (before capitalized items) generated in FY 2022, keep in mind the first quarter usually is the weakest for Rheinmetall. Last year, less than 20% of the full-year revenue was generated in the first quarter.

Having this kind of fluctuation also means the net income in the first quarter is usually lower to substantially lower than anticipated.

That’s also clearly visible on the image below, which shows the Q1 2023 income statement. The total EBIT was just 76M EUR which actually is a decrease from the 81M EUR in Q1 2022. That’s perhaps a little bit unexpected but let’s also not forget the impact of inflation-related issues will be the strongest when comparing the first quarters of this year and last year. The net income of 51M EUR with a net income of 54M EUR attributable to the shareholders of Rheinmetall is somewhat disappointing but also not surprising.

The Q1 EPS is also pretty irrelevant in the greater scheme of things. The most important takeaway of the Q1 update is Rheinmetall’s confirmation of the full-year guidance. As you can see below, the company expects to generate a total revenue of 7.4-7.6B EUR with an expected operating result margin (read: EBIT margin) of approximately 12%, which would be in line with the FY 2022 results.

Using a 7.5B EUR revenue (the midpoint of the official guidance) and applying a 12% EBIT margin would result in an EBIT of approximately 900M EUR. That’s an additional increase of in excess of 20% compared to FY 2022. Assuming net interest expenses of 40M EUR, this would indicate a pre-tax income of 860M EUR. Assuming an average tax rate of 26% (which is slightly higher than the past few years), the net income from continuing operations will be roughly 636M EUR of which about 75M EUR could be attributable to the non-controlling interests.

Rounding this down, I now do think a net income attributable to the common shareholders of Rheinmetall of 550M EUR is pretty feasible which would result in an EPS of approximately 12.70 EUR. I think this still is a pretty conservative view as the average consensus estimates are pointing towards an EPS of 14.1 EUR for this year and 19 EUR next year. One caveat though: the average estimates for this year are based on a total revenue of approximately 7.8B EUR which would be about 3% higher than the higher end of the company’s official guidance. Needless to say this 300M EUR in additional revenue versus my scenario using the midpoint of the official guidance adds a few Euro per share to the EPS result.

Investment thesis

Before looking at the Rheinmetall Q1 results, I was expecting I’d have to downgrade the stock to a sell. But after digging deeper into the results from the first quarter and seeing how the order book has further increased to in excess of 28B EUR (which is almost 4 times the anticipated revenue for this year), I agree with the recent theses from the other authors here on Seeking Alpha Rheinmetall may be able to benefit from tailwinds for years to come .

And I’m not talking my own book here as my approach has proven to be too conservative. As explained in the previous article I wanted to write out of the money put options on Rheinmetall in an attempt to buy the shares at an even lower price but the stock ran away from me and my sole consolation prize was pocketing the option premium. Based on my (rather conservative) calculations for 2023, the stock is a ‘hold’ at best. But if Rheinmetall indeed surprises to the upside and is able to show an additional 10% revenue increase in 2024, the 2024 EPS will likely come in closer to or even exceed 15 EUR per share. And although a multiple of 16 times on an EPS is rather high, it does not appear to be an outrageous price to pay for an European defence company and it is in line with the valuations of the US-based companies like Lockheed Martin ( LMT ) and Raytheon ( RTX ).

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