Decisive Moves In E-Mobility And Operational Efficiency To Power Revenue And Margin Growth

Key Takeaways

• Strategic cost synergies and operational efficiencies are expected to improve earnings and net margins, bolstering future financial performance.
  
• Successful integration of Vitesco enhances E-Mobility growth, with strong order intake supporting revenue increases in line with market trends.
  
• Heavy reliance on E-Mobility success and restructuring costs pose risks to revenue and margin stability amidst European market and industry challenges.

Catalysts

Develops, manufactures, and sells components and system for industrial applications in Europe, the Americas, China, and the Asia Pacific.

• Schaeffler's Program Forward aims to achieve a recurring EBIT impact of €290 million annually by 2029, focusing on cost synergies and operational efficiencies, which is expected to improve future earnings and net margins.
  
• The successful integration of Vitesco is anticipated to drive growth in the E-Mobility segment, which combined with strategic cost synergies, is expected to contribute positively to revenue and earnings.
  
• With a strong order intake in E-Mobility, Schaeffler's investment strategy in the U.S. and hybrid technologies could lead to revenue growth as E-Mobility trends accelerate.
  
• The Vehicle Lifetime Solutions division is showing continuous strong sales growth and record EBIT margins, positioning it as a leading segment for long-term revenue and margin contributions.
  
• Actions to streamline European operations, including headcount reductions and location consolidations, are expected to enhance cost efficiencies, impacting net margins positively by reducing operating costs.

Schaeffler Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Schaeffler's revenue will grow by 21.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.9% today to 5.6% in 3 years time.
• Analysts expect earnings to reach €1.6 billion (and earnings per share of €2.01) by about December 2027, up from €144.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 3.6x on those 2027 earnings, down from 29.3x today. This future PE is lower than the current PE for the GB Auto Components industry at 19.3x.
• Analysts expect the number of shares outstanding to decline by 5.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Schaeffler Future Earnings Per Share Growth

Risks

• The market-driven sales decline in Bearings & Industrial Solutions and the need for self-help measures indicate a challenging environment, which could impact revenue growth adversely.
  
• The integration challenges and ongoing transformation in the European automotive industry suggest potential risks to operational efficiency, affecting net margins.
  
• The 2026 projected impact timeline for Program Forward and cash flow contributions suggests delayed financial benefits, potentially constraining earnings in the interim years.
  
• The heavy reliance on the success of ramp-ups in E-Mobility, amidst a weak European automotive and industrial market, presents a risk to both revenue and margin stability.
  
• The significant restructuring costs required for headcount reductions and transformation initiatives could impact the company’s financials and cash flows in the short term.

Valuation

• The analysts have a consensus price target of €5.87 for Schaeffler based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €8.8, and the most bearish reporting a price target of just €4.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €28.8 billion, earnings will come to €1.6 billion, and it would be trading on a PE ratio of 3.6x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of €4.46, the analyst's price target of €5.87 is 24.0% higher.
  
• 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.