E-Mobility Consolidation Will Unlock New Operational Strengths

Key Takeaways

• Strategic focus on E-Mobility and Vitesco consolidation expected to boost sales and profitability, enhancing future revenue growth and margins.
  
• Refinancing strategy strengthens financial stability, potentially reducing interest expenses and increasing liquidity for growth initiatives.
  
• Continued underperformance in key divisions, integration challenges, and economic uncertainties could impact Schaeffler's profitability, financial stability, and investor confidence.

Catalysts

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

• The full consolidation of Vitesco is expected to add significant sales volume and profitability improvements in the E-Mobility division, which should boost future revenue growth.
  
• The strategic focus on E-Mobility is projected to result in a significant increase in top-line performance due to higher expected volumes, improving revenues and potentially increasing margins.
  
• The improvement in EBIT margins, particularly noted in the second half of the year for divisions such as E-Mobility, suggests operational efficiencies are expected, which should enhance net margins.
  
• A detailed allocation logic applied to corporate services costs and an incubator initiative for humanoids and hydrogen may optimize operational efficiencies, potentially improving net margins in the long term.
  
• The refinancing strategy executed by Schaeffler appears to solidify financial stability, which may positively impact future earnings by reducing interest expenses and increasing liquidity available for strategic growth initiatives.

Schaeffler Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Schaeffler's revenue will grow by 13.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.5% today to 3.0% in 3 years time.
• Analysts expect earnings to reach €790.2 million (and earnings per share of €0.87) by about May 2028, up from €-632.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €908.6 million in earnings, and the most bearish expecting €671.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.9x on those 2028 earnings, up from -5.6x today. This future PE is lower than the current PE for the GB Auto Components industry at 11.6x.
• 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 8.82%, as per the Simply Wall St company report.

Schaeffler Future Earnings Per Share Growth

Risks

• The unaudited pro forma results indicate a negative free cash flow of €694 million for 2024, which includes significant one-off items. Potential challenges in achieving sustainable positive free cash flow could impact the company's ability to fund operations and investments without additional financing.
  
• The EBIT margin is relatively low at 3.5% for 2024, with some of the divisions experiencing volume-driven profitability challenges, notably Bearings & Industrial Solutions, which could pressure net margins.
  
• The E-Mobility division reported a significant negative EBIT margin of 22% in 2024, despite expectations of improvement in 2025. Continued underperformance in this division could adversely affect group earnings.
  
• Vitesco's integration, including differences in IFRS interpretations and overhead allocations, has altered Schaeffler's profitability structure, which could complicate transparent financial performance tracking and affect investor confidence.
  
• Possible economic uncertainties, including impacts from tariffs and expected volume declines in key divisions, could lead to revenue fluctuations, affecting forecasts and stability in earnings.

Valuation

• The analysts have a consensus price target of €5.233 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 €7.6, and the most bearish reporting a price target of just €3.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €26.4 billion, earnings will come to €790.2 million, and it would be trading on a PE ratio of 9.9x, assuming you use a discount rate of 8.8%.
• Given the current share price of €3.78, the analyst price target of €5.23 is 27.8% 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.