February 14, 2025
Investors aren’t buying analysts’ view on European carmakers

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(Bloomberg) — European autos have the biggest increases in analysts’ price targets, yet they’re also the cheapest sector there as investors price in for tough times ahead.

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Carmakers have been under pressure for nearly two years as slumping demand, low growth in China, fierce competition in electric vehicles and declining pricing power build up a wall of concern for the sector. That’s also being reflected in valuations: The forward price-to-earnings ratio of the Stoxx 600 Auto & Parts Index is hovering around 5.3x, which is near a 17-year range low and outperforms the broad market by about 60%. There is a discount.

Bernstein analysts including Daniel Rosca wrote in a note last week, “The sector’s market share will shrink significantly in coming years and, if true, it could eventually pave the way for one of Europe’s most important industrial regions.” Will be a sign of the end.” “Market valuations indicate free-cash-flow mean-reversion of -22% and long-term growth of 1.5%.”

But the market is “very pessimistic,” according to Bernstein analysts, because it believes that the operational improvements achieved over the past few years will be eroded, while long-term growth will diminish. Despite the challenges, they see some value, with outperform ratings on Mercedes-Benz Group AG and Renault SA and market-outperform outlooks on BMW AG, Stellantis NV and Volkswagen AG. While the latter is “overvalued”, both Stellantis and Renault are “essentially priced to go out of business,” he said.

On average, sell side analysts are maintaining a positive outlook. The Stoxx 600 Auto & Parts is the subindex with the largest increase of 31% over the next 12 months. Earnings forecasts have been rising this year, reaching record highs in August, but have since stalled, with the cracks in the bullish case finally showing in estimates.

Last week, UBS downgraded Volkswagen and Renault to sell due to increased competition from Tesla Inc and Chinese rivals. Earlier this month, Tesla announced the revival of its Model 3 while again cutting prices of several variants, raising fears of an EV price war. New model announcements at the IAA Mobility car show in Munich haven’t been a strong catalyst so far.

Meanwhile, the economic data is not in favor of the car makers. European PMIs have shown no signs of improvement, according to analysts at Citigroup Inc, which could weigh on the sector further, while slowing growth in China is seen as a major issue for exposed carmakers such as BMW and Porsche AG. Is.

“Autos look cheap on several valuation measures such as price-to-book, as well as EV/Ebitda,” Mislav Matejka, strategist at JPMorgan Chase & Co., said in a note on Monday. “However, the sector is strongly linked to the momentum of activity, and the PMI’s remaining weak could result in losses.”

–With assistance from Chiara Remondini.

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Source: finance.yahoo.com

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