Diesel Engines In Off-Highway Markets Will Decline As Electrification Accelerates

Key Takeaways

• Accelerated electrification and regulatory shifts threaten DEUTZ's diesel-centric portfolio, increasing costs and reducing revenue as legacy assets lose relevance.
  
• Dependence on acquisitions, rising geopolitical risks, and new electric-focused competitors further heighten earnings volatility and compress profitability.
  
• Strategic acquisitions, service expansion, clean power initiatives, cost reductions, and rising energy demand all support DEUTZ's long-term growth, profitability, and margin resilience.

Catalysts

Develops, manufactures, and sells diesel and gas engines in Europe, the Middle East, Africa, the Asia Pacific, and the Americas.

• The rapid global shift towards electrification and alternative drivetrains is expected to significantly erode demand for DEUTZ's core diesel and gas engine products, leaving the company exposed to shrinking volume, declining revenues, and a potential for stranded legacy assets as off-highway machinery markets look to decarbonize more aggressively than previously forecasted.
  
• Intensifying regulatory pressures related to emissions and carbon targets will drive up compliance and R&D spending, resulting in structurally higher cost bases and compressing net margins-especially as DEUTZ faces delays in achieving large-scale commercialization of next-generation electric and hydrogen technologies.
  
• DEUTZ's slow pace of organic growth within traditional businesses, as evidenced by flat or slightly negative organic order intake despite strong headline growth from M&A, indicates an overreliance on inorganic expansion; this leaves the company vulnerable to earnings volatility and poor operating leverage if acquisition synergies fall short or integration proves costly.
  
• Escalating geopolitical risks and rising trade protectionism, including uncertain tariff regimes in the US and volatile foreign exchange rates, are poised to disrupt DEUTZ's global supply chains and erode export competitiveness, creating downside risks for future order flow and revenue predictability in both established and emerging markets.
  
• The emergence of new competitors focused exclusively on electric and hybrid powertrains, combined with ongoing industry consolidation and OEM bargaining power, threaten to diminish DEUTZ's pricing power, lower average contract values, and strain its ability to deliver margin expansion, potentially resulting in a long-term decline in profitability.

DEUTZ Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on DEUTZ compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming DEUTZ's revenue will grow by 13.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.8% today to 6.2% in 3 years time.
• The bearish analysts expect earnings to reach €165.6 million (and earnings per share of €1.19) by about July 2028, up from €15.5 million today. The analysts are largely in agreement about this estimate.
• 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 8.3x on those 2028 earnings, down from 69.9x today. This future PE is lower than the current PE for the GB Machinery industry at 19.5x.
• Analysts expect the number of shares outstanding to grow by 2.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.38%, as per the Simply Wall St company report.

DEUTZ Future Earnings Per Share Growth

Risks

• Strong performance and integration of recent acquisitions like Blue Star and HJS Emission Technology are significantly boosting DEUTZ's Energy and Services segments, and ongoing M&A activity in high-growth areas could provide new revenue streams and strengthen profitability over the long term, supporting resilient revenue and net income growth.
  
• Growth in DEUTZ's high-margin Service business, including continued expansion in both organic and acquired service revenue as well as digital aftermarket solutions, is leading to recurring revenue improvements and contributing to the stability and potential expansion of group net margins.
  
• Accelerated investment and commercialization of alternative and electrified drivetrains through the acquisition of Urban Mobility Systems positions DEUTZ to benefit from the shift toward clean power solutions in off-highway applications, potentially offsetting declines in classic engine sales and providing long-term top line resilience.
  
• Successful execution of the Future Fit cost reduction program, with approximately €50 million targeted annual savings and progress on workforce optimization, directly supports operating leverage and may significantly enhance EBIT margin and earnings as cost savings are fully realized from 2026 onward.
  
• Robust demand trends in the Energy business, especially in the wake of events highlighting grid vulnerability (such as blackouts in Europe and natural disasters in the US), together with expanding infrastructure investment and a growing customer base in North America, present long-term secular tailwinds which are likely to drive higher sales, revenue, and order intake for DEUTZ's power generation and stationary equipment solutions.

Valuation

• The assumed bearish price target for DEUTZ is €7.6, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of DEUTZ'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 €10.9, and the most bearish reporting a price target of just €7.6.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €2.7 billion, earnings will come to €165.6 million, and it would be trading on a PE ratio of 8.3x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of €7.81, the bearish analyst price target of €7.6 is 2.8% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.