Software Defined Vehicles And Autonomous Driving Will Expand Market Opportunities

Key Takeaways

• Strategic partnerships and significant R&D efforts in autonomous driving could enhance competitiveness and profitability through early market entry and reduced time to market.
  
• Expansion into new markets and defense order growth underpin expectations for higher future revenues and margins, aligning with sustainability goals.
  
• Declining delivery figures and geopolitical uncertainties pose risks to revenues, with high R&D expenditures and weakened margins compounding challenges in critical markets.

Catalysts

Manufactures and sells commercial vehicles in Germany, rest of Europe, the United States of America, rest of North America, Brazil, rest of South America, and internationally.

• The strategic partnership between TRATON and Applied Intuition on software-defined vehicles is expected to substantially reduce time to market for new products, potentially enhancing future revenues and net margins.
  
• Significant R&D efforts in autonomous driving and projects like the BeIntelli automated MAN eBus initiative could lead to early market entry and a competitive advantage, improving future revenue and net margins.
  
• The new Scania defense order and anticipated ramp-up in the European defense industry are expected to enhance future revenues and margins through increased production and delivery of defense vehicles.
  
• TRATON Financial Services’ expansion into new markets (Mexico, France, and Italy) underpins expectations for increased future revenue and earnings through a broader financial services portfolio supporting vehicle sales.
  
• Growth in order intake, especially for battery electric vehicles, and MAN’s battery pack production ramping up could lead to increased unit sales and revenue, aligning with sustainability goals while improving net margins due to economies of scale.

Traton Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Traton's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.4% today to 6.9% in 3 years time.
• Analysts expect earnings to reach €3.5 billion (and earnings per share of €6.82) by about May 2028, up from €2.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €3.8 billion in earnings, and the most bearish expecting €2.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.4x on those 2028 earnings, up from 5.7x today. This future PE is lower than the current PE for the DE Machinery industry at 18.7x.
• Analysts expect the number of shares outstanding to decline by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.75%, as per the Simply Wall St company report.

Traton Future Earnings Per Share Growth

Risks

• Declining delivery figures in key truck markets in Europe and North America due to challenging market conditions indicate potential risks to future revenues.
  
• The decline in sales revenues, operating result below analysts' expectations, and a reduction in adjusted return on sales due to volume effects, foreign currency headwinds, and higher R&D expenses negatively impact net margins and earnings.
  
• Uncertainties related to geopolitical and economic conditions, such as potential tariffs in the U.S., could affect order intake and production planning, posing risks to revenue stability.
  
• The substantial R&D investments required for future projects like software-defined vehicles and autonomous driving could limit profit margins if these projects don't produce expected returns.
  
• The challenges in the North American market, including a 35% drop in order intake and removal of a second production shift, indicate risks to revenue and earnings growth in that region.

Valuation

• The analysts have a consensus price target of €34.602 for Traton 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 €50.0, and the most bearish reporting a price target of just €23.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €49.9 billion, earnings will come to €3.5 billion, and it would be trading on a PE ratio of 6.4x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of €28.9, the analyst price target of €34.6 is 16.5% 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.