New Acquisitions And Mercedes-Benz Partnership Will Expand North American Reach

Key Takeaways

• Strategic acquisitions and partnerships in various sectors are driving substantial sales growth and enhancing brand presence in key markets.
  
• Local production and efficient cash management position Fuchs to navigate economic challenges, protect margins, and improve EPS.
  
• Economic uncertainties, trade tensions, and high costs threaten Fuchs' revenue growth, operating margins, and supply chain stability, with notable challenges in China and South America.

Catalysts

Develops, produces, and distributes lubricants and functional fluids in Europe, the Middle East, Africa, the Asia Pacific, and North and South America.

• Fuchs SE has seen substantial sales growth driven by both internal volume growth and strategic acquisitions, such as LUBCON, Strub Group, and Boss Lubricants. These acquisitions will likely contribute to sustained revenue growth.
  
• The company has successfully integrated new contracts and expanded its footprint in the automotive aftermarket, particularly in North America with the Mercedes-Benz partnership. This is expected to drive future revenue and enhance brand presence in the U.S. market.
  
• Fuchs's investment in a local-for-local production approach, particularly in significant markets like China, positions it favorably against competitors in navigating tariffs and economic uncertainties. This strategy is anticipated to protect and potentially expand margins by reducing costs and supply chain disruptions.
  
• The company's proactive integration of bolt-on acquisitions and expansion into high-end specialty segments, as highlighted by the partnership with Dumarey Group in hydrogen engines, indicates potential for revenue growth and improved net margins with high-value product lines.
  
• Fuchs continues to maintain a strong cash position, supported by effective working capital management and a previous share buyback, setting a foundation for potentially better earnings per share (EPS) outcomes as it navigates cost management and investment in growth.

Fuchs Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fuchs's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.6% today to 9.2% in 3 years time.
• Analysts expect earnings to reach €359.4 million (and earnings per share of €2.75) by about May 2028, up from €302.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €309.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.4x on those 2028 earnings, up from 19.1x today. This future PE is greater than the current PE for the GB Chemicals industry at 17.2x.
• Analysts expect the number of shares outstanding to decline by 0.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.1%, as per the Simply Wall St company report.

Fuchs Future Earnings Per Share Growth

Risks

• Economic weaknesses and global tariff discussions could impact demand and margins, risking future revenue growth.
  
• The company's EBIT growth was underproportionate to sales growth, indicating potential pressure on operating margins.
  
• High integration costs and initial investments for new acquisitions might temporarily strain net margins.
  
• Challenging environments in South America could affect revenue and earnings negatively.
  
• Dependency on Chinese operations amid potential international trade policy shifts poses risks to revenue and supply chain stability.

Valuation

• The analysts have a consensus price target of €49.444 for Fuchs 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 €58.0, and the most bearish reporting a price target of just €39.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €3.9 billion, earnings will come to €359.4 million, and it would be trading on a PE ratio of 20.4x, assuming you use a discount rate of 5.1%.
  
• Given the current share price of €44.04, the analyst price target of €49.44 is 10.9% 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.