Rising Electric Vehicle Adoption Will Erode Legacy ICE Profits

Key Takeaways

• Over-dependence on traditional engine components amid rapid electrification and tougher emission rules will hurt revenue, margins, and long-term profitability.
  
• Rising competition, slower EV diversification, and global supply chain shifts will weaken market share, pricing power, and export-driven resilience.
  
• Successful diversification, market share gains, strong acquisition integration, and balance sheet strength position the company for resilient growth and reduced risk amid industry transition.

Catalysts

An automotive parts company, manufactures and sells components for internal combustion engines and automotive filters in South America, Europe, Central and North America, Africa, and internationally.

• The accelerating shift toward fully electric vehicles and increasingly aggressive ICE phase-out policies globally is set to erode core demand for traditional engine components, which still represent the mainstay of MAHLE Metal Leve's product mix. This secular decline is poised to drive persistent revenue contraction over the longer term, even as the company makes incremental moves into thermal management and other adjacent areas.
  
• More stringent global emission regulations and rapid electrification policies are likely to disproportionately increase compliance costs for legacy suppliers like MAHLE Metal Leve, resulting in higher ongoing operating expenses while simultaneously shrinking the addressable market for its high-margin engine parts. This will further compress net margins and could lead to structurally lower profitability levels.
  
• The company remains heavily dependent on ICE and hybrid engine components, and recent acquisitions have lower aftermarket exposure and margin profiles compared to legacy operations. Combined with the sluggish pace of product diversification into pure EV powertrain systems, this trend threatens both long-term earnings sustainability and future margin expansion.
  
• Intensifying competition from major consolidating players that offer integrated EV-centric solutions, as well as disruptive new entrants from Asia and the technology sector, is likely to place growing downward pressure on MAHLE Metal Leve's pricing power and erode market share, undermining both revenue growth and operational leverage.
  
• Localization of supply chains by major global automakers and rising trade protectionism-including new tariffs and tax regime shifts in key export markets-will limit export opportunities for MAHLE Metal Leve, reducing its resilience against weak domestic cycles. This will negatively impact both top-line growth and the company's ability to maintain stable or expanding earnings.

MAHLE Metal Leve Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on MAHLE Metal Leve compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming MAHLE Metal Leve's revenue will grow by 7.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 10.4% today to 10.3% in 3 years time.
• The bearish analysts expect earnings to reach R$612.7 million (and earnings per share of R$3.59) by about July 2028, up from R$499.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.8x on those 2028 earnings, up from 7.8x today. This future PE is greater than the current PE for the BR Auto Components industry at 8.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.45%, as per the Simply Wall St company report.

MAHLE Metal Leve Future Earnings Per Share Growth

Risks

• The company is successfully diversifying beyond traditional internal combustion engine components, with new business wins in Battery Thermal Management Systems for electric and hybrid buses and cooling modules for tractors, which positions it to benefit from growing trends in vehicle electrification and agri-business, potentially supporting revenue growth and reducing risk from ICE decline.
  
• MAHLE Metal Leve is capturing market share in light vehicle components such as pistons and canisters, resulting in organic revenue growth outpacing the overall market benchmark, which can drive long-term revenue and earnings expansion if this trend continues.
  
• Recent acquisitions, including compressors and thermal businesses, are performing above expectations in revenue, EBIT, and EBITDA compared to initial valuations, suggesting successful integration and potential for margin expansion and improved earnings over time.
  
• The company's healthy balance sheet, as indicated by lower-than-expected net indebtedness and leverage, along with prudent reserve management, enables continued investment in innovation and resilience against macroeconomic shocks, which can support stable net margins and financial flexibility.
  
• Accelerated synergies from integration of acquisitions and investment in modernization/capex are leading to manufacturing efficiencies and productivity gains, providing operating leverage that could improve net margins and long-term earnings as scale grows.

Valuation

• The assumed bearish price target for MAHLE Metal Leve is R$26.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of MAHLE Metal Leve's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$39.0, and the most bearish reporting a price target of just R$26.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be R$6.0 billion, earnings will come to R$612.7 million, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 19.5%.
  
• Given the current share price of R$28.65, the bearish analyst price target of R$26.0 is 10.2% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.