Today we have a speculative idea: take shares in the German industrial company Rheinmetall AG (ETR: RHM), in order to capitalize on the industrial rise of Germany and Europe.
Growth potential and validity: 12,5% behind 14 months excluding dividends; 39% during 5 years excluding dividends; 7% per year for 15 years including dividends.
Why stocks can go up: because in Europe the industrial boom.
How do we act: we take shares now by 83,38 €.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
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And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark: as with the investment idea as a whole, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
The name of the company (It.: "Rhine metal") betrays her with giblets - she is German and is engaged in the production of industrial metal parts.
Revenue of the company, according to the latest annual report, shares like this:
- Automotive 36,61%. Segment operating margin — 1,5% from its proceeds. For the sake of justice, in "pre-war" 2019, this figure was 6,7%.
- Defense - 63,39%. Segment operating margin — 11,1% from its proceeds.
In the winter of 2021, the company's management made a strategic decision to calculate revenue in a new way. According to this structure, in the first half of 2021 - for the whole 2021 data, of course, no - the company's revenue in a different way.
Distribution of the company's revenue
| Percentage of total revenue | Segment pre-tax profit margin | |
|---|---|---|
| Transport systems | 33,69% | 7,01% |
| Weapons and ammunition | 18,24% | 7,85% |
| Electronic solutions | 14,02% | 7,45% |
| Sensors and actuators | 26,99% | 7,03% |
| Materials and fasteners | 7,06% | 8,12% |
Weapons and ammunition
Electronic solutions
Sensors and actuators
Materials and fasteners
In practice, the new calculation method does not change anything: the company is still split into automotive and military business. And the second prevails.
Company revenue by country and region for 2020:
- Germany - 34,34%.
- Other European countries - 28,18%.
- The Americas and the Middle East 10,33%.
- Asia - 17,03%.
- Other unnamed regions − 10,12%.
Arguments in favor of the company
Everything got better. Fresh industrial data from Germany and other Eurozone countries were better than expected, in connection with which we can modestly hope, that the company will have good sales for at least a couple of quarters. And in other parts of the world, things are going well - which is important, because the company's business is international.
Reliable. At the moment, the company has enough unfulfilled orders for less than two years of work.. The defense sector also adds attractiveness to the company's shares.. It gives the largest share of orders, which makes the company's business pleasantly predictable. Moreover, this segment can grow, as the level of tension in the world does not subside.
Cheap. P / S for the company is approximately 0,6, which is incredibly cheap. P / E at Rheinmetall is quite acceptable - 16,7. Basically, this makes it attractive to ordinary shareholders as well, especially considering its dividends. But it can also attract a US buyer to the company.. It is unlikely that the German government will quickly approve such a deal., as the UK is doing now with respect to Parker-Hannifin, but such news will allow you to pump up quotes.
Dividends. The company pays 2 € dividend per share per year is approximately 2,39% per annum. By the standards of Germany, this is a huge profitability., so that in the company's shares closer to the payment of dividends, a lot of lovers of divas will fill up. Due to coronavirus troubles, Rheinmetall cut dividends from 2,4 € to 2 €. But now things are going better for Rheinmetall - this allows investors to hope, that the company will not cut payments in the foreseeable future.
What can get in the way
Logistics and other troubles. 49% The company's workforce is located outside of Germany - mostly in Europe, but the company has large operations in America, Asia and Australia.
In conditions of shortage of materials and rising cost of transportation, this, certainly, will be a problem for Rheinmetall and will be reflected in its reporting - raw materials will take a long time, delivery will be expensive, and the raw material itself will be more expensive. This will have the greatest impact on the company's automotive business.: automotive companies around the world are now suffering from a shortage of semiconductors.
I'm generally silent about the threat of large-scale quarantine: she is permanent, and the consequences of such a quarantine would be devastating for most industrial enterprises. But at the moment, the main problems are logistics and rising costs.: All businesses in the Eurozone are now complaining about this..
"You thought, I won't beat you? I won't destroy?» Cutting dividends is like dividing Poland: then, what happened more than once, can happen many, many times. All in all, we can't be on 100% insured against a new dividend cut by the company.
The company spends 86.6 million euros on dividends per year - approximately 39,7% from her profits for the past 12 Months. At the moment, the company's debt is 5.086 billion euros, and during the year Rheinmetall needs to repay 1.875 billion. Money at the disposal of Rheinmetall, basically, enough: 1,144 billion debts of counterparties and 793 million on accounts, have assets, offered for sale, and other liquid assets. But the possibility of another dividend cut is very high.: the company may need money for investment projects or simply to cover damage from force majeure. Shares will fall from dividend cuts.
What's the bottom line?
We take shares now by 83,38 €. And then there are several options.:
- Think, that a combination of positive factors will lead to a rise in stocks to 94 € - level of February 2020. In my opinion, the main positive moment for investors here will be a combination of the relative reliability of the business in a pandemic and dividends.
- Wait, when will the stock be back 116 €, who asked for them in September 2019. Think, return to this level will have to wait for the following 5 years.
- Hold next shares 15 years and receive dividends.
