Vitesco Integration Will Drive Synergies And Boost Future Profitability

Key Takeaways

• Successful Vitesco integration may yield synergies and profit gains, enhancing future earnings and margins.
  
• Strong E-mobility order intake and focus on non-traditional sectors indicate potential long-term revenue growth.
  
• Integration of Vitesco challenges Schaeffler with complex adjustments, weak EV market performance, and restructuring, risking earnings, revenue growth, and cash flow stability.

Catalysts

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

• The successful execution and integration of Vitesco could lead to significant synergies and profit improvements, as synergies and the full integration of the company are expected to enhance future earnings.
  
• Schaeffler's focus on managing and optimizing production costs, especially in the Bearings & Industrial Solutions division, may improve net margins through cost efficiencies.
  
• The strong order intake in the E-mobility segment suggests Schaeffler is well-positioned for future growth in this area, potentially boosting long-term revenue.
  
• Strategic positioning in high-growth areas such as humanoid robots and defense, despite not having current large orders, showcases a direction towards expansion in non-traditional sectors which can enhance revenue.
  
• Schaeffler is undergoing a significant performance improvement program, particularly in Europe, promising operational efficiencies that could boost earnings by reducing expenses.

Schaeffler Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Schaeffler's revenue will grow by 15.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.5% today to 3.3% in 3 years time.
• Analysts expect earnings to reach €908.6 million (and earnings per share of €1.36) by about March 2028, up from €-632.0 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 9.1x on those 2028 earnings, up from -6.5x today. This future PE is lower than the current PE for the GB Auto Components industry at 11.3x.
• 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 8.63%, as per the Simply Wall St company report.

Schaeffler Future Earnings Per Share Growth

Risks

• The amalgamation of Vitesco's financials with Schaeffler has led to complex accounting adjustments, including IFRS conversion impacts, which have resulted in a margin dilution that could negatively impact earnings.
  
• The Bearings & Industrial Solutions segment experienced significant difficulties, including sales decline and an unacceptable margin, posing a risk to revenue stability and future profitability.
  
• Weak performance in the EV market, particularly in Europe, and market challenges in the industrial sector could hinder future revenue growth expectations.
  
• There is considerable reliance on strategic execution and achieving planned synergies from the Vitesco integration, which involves significant structural measures and cash flow strain, potentially impacting net margins and free cash flow.
  
• Notable restructuring expenses and deferred tax asset write-offs have led to a negative net income, and continued cash outflows for restructuring may further pressure financial outcomes, affecting earnings and free cash flow.

Valuation

• The analysts have a consensus price target of €5.6 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 2028, revenues will be €27.9 billion, earnings will come to €908.6 million, and it would be trading on a PE ratio of 9.1x, assuming you use a discount rate of 8.6%.
• Given the current share price of €4.32, the analyst price target of €5.6 is 22.8% 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.