Mexico's Automotive Expansion And Latin American Growth Poised To Boost Earnings

Key Takeaways

• Increased vehicle production in Mexico and Brazil will potentially boost regional revenue and net margins.
  
• Strategic investments and deleveraging efforts are expected to enhance financial stability and future earnings growth.
  
• European market challenges, North American production cuts, and fierce competition in China threaten CIE Automotive’s revenue growth and net margins across key regions.

Catalysts

Designs, manufactures, and sells automotive components and sub-assemblies worldwide.

• The growing vehicle production and exports in Mexico, as Mexico becomes an increasingly important automotive production hub, are expected to boost CIE Automotive's revenue from this region.
  
• Expansion in Brazil through higher vehicle sales driven by improved access to financing and exports growth, expected to enhance CIE Automotive's revenue and net margins in that geography.
  
• The strategic investment in a new plant in North Mexico, aimed at supporting future sales and results, is likely to contribute to future revenue growth.
  
• CIE Automotive's ongoing focus on improving product mix in North America, particularly through Mexico’s aluminum plants producing more value-added products, is anticipated to positively impact net margins.
  
• The significant financial deleveraging, despite higher CapEx and dividends, is expected to improve CIE Automotive's financial stability and support future earnings growth.

CIE Automotive Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CIE Automotive's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.8% today to 9.7% in 3 years time.
• Analysts expect earnings to reach €424.3 million (and earnings per share of €3.53) by about January 2028, up from €312.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, up from 9.7x today. This future PE is lower than the current PE for the GB Auto Components industry at 18.2x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.94%, as per the Simply Wall St company report.

CIE Automotive Future Earnings Per Share Growth

Risks

• European market challenges, including inventory normalization and consumer decision difficulties, alongside internal uncertainties about import regulations and tariffs, contribute to a decline in electric vehicle penetration, potentially affecting revenue from European operations.
  
• Production cuts in North America, specifically in the USA due to initiatives from companies like Stellantis and macroeconomic uncertainties due to political factors, could result in reduced earnings from this region.
  
• The competitive environment in China's automotive market, described as a fierce price war, and the lack of notable recovery despite subsidy efforts, may negatively impact net margins and revenue growth in China.
  
• Profit warnings from major automotive manufacturers and the challenging macroeconomic context, including struggles in China, highlight risks to future sales and profits across the industry.
  
• The potential restructuring at Volkswagen and other European automotive companies, which are significant customers, could result in demand fluctuations, impacting revenue predictability and operational stability.

Valuation

• The analysts have a consensus price target of €32.73 for CIE Automotive 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 €35.11, and the most bearish reporting a price target of just €26.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €4.4 billion, earnings will come to €424.3 million, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 8.9%.
• Given the current share price of €25.4, the analyst's price target of €32.73 is 22.4% 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.