Citigroup on Monday revised its recommendations for two major European defence contractors after a broad retreat in the sector. In a research note authored by Charles Armitage and Rodrigo Campo, the bank upgraded Rheinmetall to "buy" with a target price of €1,408 and raised Saab to "neutral" with a target of SEK527.
Citi said the recent downward pressure on share prices stems largely from investor concerns that a negotiated peace in Ukraine could dampen defence demand and from uncertainty about whether European governments will fund defence spending targets equivalent to 3.5% of GDP. The note argued, however, that those declines look overdone.
"We believe they are overdone as we believe Russia will likely continue to be a threat to Europe," the analysts wrote.
Rheinmetall was trading at €1,120 as of May 15, giving Citi an expected total return to its target of 26.9%. While Citi trimmed its Rheinmetall target slightly from €1,480, the reduction reflected a 5% higher share count rather than a change to the underlying fundamentals, the note said.
The bank's "what's priced in" analysis suggests the market currently implies a 5% decline in Rheinmetall's profit compound annual growth rate (CAGR) between 2030 and 2035. Excluding the Weapons and Ammunition division - which Citi values at €318 per share on a standalone basis - the rest of Rheinmetall is priced for a 5% profit CAGR over that same period. That stands in contrast to consensus forecasts that call for roughly 35% profit growth annually between 2026 and 2030.
Citi sets a two-part valuation for Rheinmetall. The Weapons and Ammunition business is valued by DCF at an estimated €266 to €372 per share, while the remaining divisions carry a DCF valuation of €1,089 per share under assumptions of a 27% profit CAGR to 2031, an 8% CAGR to 2036 and 3% terminal growth. The midpoint ammunition valuation of €318 combined with the €1,089 figure underpins the €1,408 target.
On ammunition demand, Citi expects volumes to fall to roughly 5-6% of peak production once European stockpiles are rebuilt, citing a typical ammunition lifespan of 20 to 40 years.
Geographically, Germany accounted for 38% of Rheinmetall's sales last year, 43% came from the rest of Europe and 19% from the rest of the world, according to the research note. Citi projects Germany's procurement budget to expand at a 12.3% CAGR from 2025 to 2035, while Rheinmetall's composite weighted procurement CAGR across its geographic exposure is estimated at 8.3%.
For Saab, Citi raised its target modestly from SEK516 to SEK527. Saab was trading at SEK482.75 at the time of the note. The SEK527 target equates to approximately 26x 2026 EV/EBIT and reflects a time-value-of-money adjustment.
Citi's analysis shows the implied profit CAGR from 2030 to 2035 at current prices is about 11%, down from roughly 24% implied at Saab's peak share price of SEK748 reached on Jan. 19. The firm's DCF for Saab assumes a 14% EBIT CAGR from 2026 to 2031, a 9% weighted average cost of capital (WACC), medium-term profit growth of 9% and a long-term growth rate of 3%.
Citi also lays out downside and upside scenarios for Saab. The bear case points to a 49% downside to SKr248, driven by assumptions including 80% cash conversion, 10% long-term margins and a 20% multiple derating tied to a peace outcome in Ukraine. The bull case reaches SKr918 under assumptions of 15% medium-term profit growth and 100% cash conversion.
More broadly, Citi's valuation framework indicates several defence companies are being priced by the market for negative profit growth between 2030 and 2035. Within the set, Dassault Aviation implies the steepest decline, at around 28% over the period.
Analytical note: The Citigroup note combines scenario-based DCF valuations and "what's priced in" implied growth analyses to assess market expectations across the defence sector. The firm used detailed profit growth and cash conversion assumptions to construct bear and bull cases, and it adjusted targets to reflect updated share counts where applicable.