Rising Tariffs And Slow EV Shift Will Erode Value

Key Takeaways

• Heavy reliance on combustion engine components exposes the company to declining markets as EV adoption accelerates, risking loss of revenue and market relevance.
  
• Rising tariffs and localization pressures are shrinking export margins and opportunities, while slow product transition leaves the company vulnerable to competitor advances.
  
• Diversified growth across aftermarket, exports, and innovation, plus strong OEM ties and rising vehicle lifespans, underpin recurring revenue and earnings resilience despite global market shifts.

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.

• Intensifying global transition to electric vehicles is leading to a long-term contraction in demand for internal combustion engine components, which make up a majority of MAHLE Metal Leve's product portfolio. This structural decline is expected to reduce the company's core revenue base and eventually erode organic sales growth across both OEM and aftermarket segments.
  
• Recent escalation of US import tariffs on Brazilian auto components from 10% to 50%, with confirmation that none of MAHLE Metal Leve's major products qualify for lower rates, is likely to significantly reduce export volume and margin on US-bound sales, putting persistent downward pressure on both top-line revenues and net margins from one of its most important international markets.
  
• Sluggish progress in shifting the product mix toward hybrid and fully electric powertrains leaves the company highly exposed to technology obsolescence, while competitors and OEMs rapidly reallocate investments toward EV suppliers; this lag is poised to compress gross margins and reduce future market share as hybrid and EV adoption accelerates, even in Latin America.
  
• Global supply chain localization and the resurgence of protectionist trade policies are making it increasingly challenging for multinational suppliers like MAHLE Metal Leve to compete profitably abroad, resulting in higher cost of goods sold, reduced export opportunities, and compressed net margins in the medium-to-long term.
  
• Downward trends in vehicle production in Europe and North America-two key export destinations-combined with cyclical headwinds in heavy-duty vehicles, mean the company is unlikely to benefit from secular global vehicle parc growth, putting further pressure on export revenues and increasing earnings volatility as growth becomes dependent on a softer, more cyclical regional market.

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 5.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 10.5% today to 10.2% in 3 years time.
• The bearish analysts expect earnings to reach R$608.3 million (and earnings per share of R$3.55) by about August 2028, up from R$537.8 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 10.1x on those 2028 earnings, up from 6.9x today. This future PE is greater than the current PE for the BR Auto Components industry at 7.3x.
• 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 20.58%, as per the Simply Wall St company report.

MAHLE Metal Leve Future Earnings Per Share Growth

Risks

• Global growth in vehicle parc, especially in Brazil and Argentina where vehicle production and sales are seeing strong double-digit growth, will help underpin resilient demand for MAHLE Metal Leve's products, supporting stable or growing revenues over time.
  
• Expansion of MAHLE Metal Leve's aftermarket and export operations-including significant acquisitions in compressors and thermal systems-are driving robust organic revenue growth and higher-margin business lines, which may help offset cyclical and OEM-related downturns, supporting net margins and earnings stability.
  
• Sustained investment in R&D and new programs for fuel-efficient and flex-fuel vehicles, aligned with government-led initiatives in Brazil like increased ethanol blending and green tax reform, position MAHLE Metal Leve as a beneficiary of long-term hybrid and ICE optimization trends, which could underpin top-line growth and earnings.
  
• Deep and long-standing relationships with leading regional OEMs, growing local market share in both equipment and aftermarket segments, and expansion into new product categories such as filters and turbo engine components, enhance revenue visibility and reduce vulnerability to short-term market shocks, supporting recurring revenues and margin resilience.
  
• Increasing vehicle lifespans and a rising used vehicle fleet throughout Latin America create a durable need for replacement parts and aftermarket components, providing a long-term buffer against the risks posed by declining new vehicle production in other global markets and helping to support both revenue and earnings over time.

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$608.3 million, and it would be trading on a PE ratio of 10.1x, assuming you use a discount rate of 20.6%.
  
• Given the current share price of R$27.51, the bearish analyst price target of R$26.0 is 5.8% 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.