ADAS Dependence And Shifting Production Will Pressure Margins And Earnings Outlook

Catalysts

About Aumovio

Aumovio develops advanced automotive technology systems for autonomous driving, safety, networking and user experience.

What are the underlying business or industry changes driving this perspective?

• Dependence on ADAS and autonomous driving content growth looks overstated, as regulatory uncertainty, export controls and shifting safety standards could slow adoption, limit pricing power and constrain revenue growth in Autonomous Mobility and Safety and Motion.
• Ongoing geographic shift of production and order intake toward China and North America, while Europe weakens, raises execution and localization risk. This could erode margins if ramp ups in new mega factories and the Texas brownfield investment underperform.
• Continued mix shift away from lower value build to print projects towards more complex electronic architectures may require higher sustained R&D and tooling support than planned. This could prevent R&D from reaching the targeted single digit share of sales and put pressure on net margins.
• Structural softness in European light vehicle production, combined with customer postponements of new program awards, could keep top line growth below global vehicle production for several years. As a result, operating leverage could work in reverse and limit EBIT expansion.
• Heavy reliance on cost cutting, footprint reductions and one time restructuring to drive recent EBIT gains risks masking an underlying low growth profile. Once the current EUR 300 million fixed cost savings wave normalizes, earnings progression could stall and free cash flow generation could weaken.

Assumptions

This narrative explores a more pessimistic perspective on Aumovio compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Aumovio's revenue will decrease by 1.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.6% today to 2.2% in 3 years time.
• The bearish analysts expect earnings to reach €394.3 million (and earnings per share of €5.3) by about December 2028, up from €-106.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €781.9 million.
• 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 13.5x on those 2028 earnings, up from -39.8x today. This future PE is greater than the current PE for the DE Auto Components industry at 7.9x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.15%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Aumovio is already delivering on a substantial self help program, with adjusted EBIT up close to 150 percent year on year and a margin trending toward the upper end of guidance. If sustained, this could structurally lift earnings and support a higher share price through improved profitability and operating leverage.
• The company has a very strong balance sheet with around EUR 4 billion in total liquidity and a net cash position of EUR 1.1 billion, giving it firepower to invest through the cycle, absorb shocks and fund growth. This could stabilize or increase earnings and underpin equity valuation resilience.
• Order intake of EUR 14.7 billion and increasing exposure to higher growth regions like China and North America, particularly in autonomous mobility, safety and user experience content, suggests long term demand visibility. This could re accelerate revenue growth as mix and regional diversification improve.
• Structural cost reductions, including a workforce reduction of about 20,000 employees, plant footprint consolidation toward mega factories and R&D efficiency programs targeting a single digit R&D to sales ratio by 2027, could deliver sustained margin expansion and higher free cash flow, which challenges the view that profitability will deteriorate.
• Disciplined capital expenditure at roughly 3 to 3.5 percent of sales and positive underlying adjusted free cash flow of EUR 190 million after nine months indicate that the business is already generating cash during a transformation phase. This could support future shareholder returns and a re rating of the share price as free cash flow improves.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Aumovio is €36.2, which represents up to two standard deviations below the consensus price target of €47.09. This valuation is based on what can be assumed as the expectations of Aumovio'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 €60.0, and the most bearish reporting a price target of just €36.2.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €18.2 billion, earnings will come to €394.3 million, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of €42.16, the analyst price target of €36.2 is 16.5% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• 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.