Better Defense Stock: Lockheed Martin vs. Rheinmetall

According to the United Nations, collective global military spending grew to $2.7 trillion in 2024, and some estimates have that figure nearing $3 trillion by the end of the decade.

American military spending alone is far and away the largest in the world at just shy of $1 trillion for the 2026 budget. However, further growth is on the table as President Trump has expressed a desire to hit $1.5 trillion in defense spending in 2027.

So, it follows that defense contractors like Lockheed Martin (NYSE: LMT) would be a good way to play the global defense spending boom.

Lockheed Martin is a good investment and is definitely one to look at, but I don't think it's slated to be the fastest-growing defense company. In all likelihood it will continue the steady market-beating 16.2% annualized growth it has enjoyed for the past five years.

That's because the fastest-growing military budget on the planet doesn't belong to the United States, it belongs to Germany.

For 2024, the German government approved $88.5 billion in military spending for 2025, which represented a 28% increase over 2023 and was up 89% from where Germany's defense budget sat in 2015. That boost alone catapulted Germany to being the fourth-largest defense spender behind only the U.S., China, and Russia.

But Germany's defense spending boom isn't done yet. In November 2025, the Bundestag approved a $129 billion military budget for 2026, a 45% increase over 2025 levels. Germany is aiming to build Europe's largest military with a goal of $180 billion in defense spending come 2030.

The company I expect to profit most from that is Dusseldorf's Rheinmetall (OTC: RNMBY).

The sleeping giant awakens

Founded in 1889 as an artillery manufacturer, Rheinmetall has grown into one of Germany's and Europe's premier defense companies. It engages in almost every facet of modern military equipment, including vehicles, artillery, ammunition, air defense systems, drones, satellites, and even naval vessels.

It also stands to profit from other European militaries rearming alongside Germany as Rheinmetall's lines of infantry-fighting vehicles (IFV), light armored vehicles, and logistics trucks are used by the militaries of Italy, Ukraine, Romania, the U.K., Spain, Hungary, Finland, and the Netherlands.

In fact, the Lynx IFV in particular won a contract for the U.S. military in 2023 to replace the aging Bradley IFV. Rheinmetall projects that becoming a major supplier in the American market could generate $2 billion in annual revenue.

In Rheinmetall's latest results (Q3 2025) it anticipated sales to grow at a compound annual growth rate (CAGR) of 30% from 2023 to 2025. Over that same period, it anticipates its backlog will grow at a CAGR of 45% and its operating margin to grow 2.7 basis points to 15.5%.

And that's on top of the growth it has already enjoyed in the initial stages of German rearmament.

Image source: Getty Images.

Europe's arsenal

For Q3 2025, Rheinmetall brought in revenue of 2.78 billion euros, a 13% increase over Q3 2024. It also grew its operating margin 0.7 points to 12.9% and saw its backlog grow 23% to 63.8 billion euros.

Sales for the first nine months of 2025 topped 7.5 billion euros, a 19% increase over the first nine months of 2024. However, Rheinmetall's diluted earnings per share (EPS) saw ballistic growth from 5.70 euros for the first nine months of 2024 to 8.09 for the first nine months of 2025, representing growth of nearly 42% year over year.

Now, the company has been spending money rather aggressively. That saw its operating free cash flow tank in Q3 2025. But most of that was due to expanding inventory for contracts to be filled, relatively low prepayments, and a later start of truck deliveries than anticipated.

It appears to be temporary as those vehicles were produced on order for various militaries. Rheinmetall does maintain a positive cash position of 557 billion euros as of Sept. 30, 2025. So, that isn't something I would worry too much about. Besides, this is a capital-intensive business as Rheinmetall needs to operate factories from which it produces all the artillery, vehicles, and ammunition it's selling.

Additionally, it's worth noting that as a major supplier to the Ukrainian military, Rheinmetall equipment is uniquely battle-tested on a modern battlefield. And Rheinmetall's next-generation tank, the Panther KF51, is equipped with anti-drone capabilities not seen on any other tank like an autonomous machine gun and loitering munitions.

The Leopard 2, also produced by Rheinmetall, is already one of the most popular tanks in the world. But with the company's unique insight into the demands of the 21st century battlefield and what it takes to make a tank survivable on it, I can easily foresee the Panther matching or exceeding the Leopard 2's popularity.

So, if you want to invest in the most rapid European rearmament we've seen since the end of the Cold War, give Rheinmetall a look.

James Hires has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin and Rheinmetall. The Motley Fool has a disclosure policy.