Rheinmetall Drops as Defense Unit Evaporates Group Profit

Rheinmetall AG fell the most in more than three months as military-budget cuts at government customers wiped out profit at the German automotive and defense-equipment supplier.

Nine-month earnings before interest and taxes fell to zero from 170 million euros ($228 million) a year earlier as a loss at the defense division, together with administrative expenses, wiped out profit from the car-components unit. Revenue fell 5.6 percent to 3.09 billion euros, the Dusseldorf-based company said in a statement today.

Rheinmetall dropped as much as 7.4 percent to 42.65 euros, the biggest intraday decline since July 30, and was trading down 6.9 percent at 12:19 p.m. in Frankfurt. Volume was more than double the three-month daily average. The drop pared the stock’s gain this year to 18 percent, compared to a 34 percent increase in Germany’s MDAX index for medium-size companies.

“Defense remains weak, and earnings so far this year have been the worst in a long time,” Juergen Pieper, an analyst at Bankhaus Metzler in Frankfurt, said by phone. At the same time, today’s stock drop was “exaggerated,” as “Rheinmetall is a classic turnaround story.” Pieper recommends clients buy the shares and expects the price to rise to 45 euros within a year.

Rheinmetall stuck to a group forecast for full-year Ebit of 180 million euros to 200 million euros, with the automotive business contributing as much as 150 million euros to that goal. The company also maintained a prediction of sales in a range of 4.7 billion euros to 4.8 billion euros.

Spending cuts in countries including the U.K. and the U.S., including troop withdrawals from operations abroad, contributed to weakness at the defense operations, with global military budgets this year forecast to decline slightly, Rheinmetall said. The unit, which makes armored vehicles and weapons systems, predicts attractive medium-term growth prospects in Asia and Middle East, the company said.

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