Declining ICE Exposure Will Pressure Volumes As EV Prospects Improve

Key Takeaways

• Heavy dependence on internal combustion components and aluminum leaves the company vulnerable as industry electrification and material trends accelerate and disrupt traditional demand.
  
• Regionalization and supply chain shifts may boost short-term competitiveness, but rising costs, customer concentration, and new global competitors threaten margins and stable growth.
  
• Rapid electric vehicle adoption, shrinking unit sales, customer concentration, and regulatory shifts could threaten Nemak's core business and margins unless new growth strategies are successfully executed.

Catalysts

Develops, manufactures, and sells aluminum components for e-mobility, structure and chassis, and ICE powertrain applications to the automotive industry in North America, Europe, and internationally.

• While Nemak is ramping up its Czech Republic facility dedicated to electric vehicle components and is viewed as highly responsive to the electrification trend, the company's overall volume remains heavily exposed to internal combustion engine components; as the pace of EV adoption accelerates and OEMs delay or adjust EV projects, the risk is that Nemak's revenue growth could stall or even decline if the transition is slower or more problematic than anticipated.
  
• Although Nemak benefits from regulatory pressure for lightweighting and is expanding its offering in advanced aluminum solutions, a growing trend towards lighter composites and polymers in the auto industry could ultimately erode traditional aluminum casting demand, pressuring long-term revenue and market relevance.
  
• Even as supply chain regionalization and nearshoring trends offer an immediate advantage in key North American markets, these same regionalization and trade shifts may introduce volatile raw material and logistical costs over time, potentially leading to squeezed margins as operational complexities mount.
  
• While operational excellence and advanced manufacturing rollouts are improving EBITDA and productivity in the short term, persistent input cost inflation for aluminum and energy, combined with high customer concentration, could limit the company's ability to sustain margin expansion and create significant earnings volatility if a major automaker reduces orders or changes platforms.
  
• Despite a growing order book for e-mobility and investments in new technologies, the continued global shift towards new competitors-especially technologically advanced Asian suppliers focused on lightweight and electric vehicle platforms-raises the risk of increased pricing pressure and reduced market share, challenging both topline growth and long-term profitability.

Nemak S. A. B. de C. V Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Nemak S. A. B. de C. V compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Nemak S. A. B. de C. V's revenue will grow by 2.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -1.7% today to 2.3% in 3 years time.
• The bearish analysts expect earnings to reach $120.8 million (and earnings per share of $0.04) by about July 2028, up from $-85.6 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 8.5x on those 2028 earnings, up from -5.7x today. This future PE is lower than the current PE for the MX Auto Components industry at 44.1x.
• Analysts expect the number of shares outstanding to decline by 3.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 22.11%, as per the Simply Wall St company report.

Nemak S. A. B. de C. V Future Earnings Per Share Growth

Risks

• The company's long-term growth is exposed to the accelerating global adoption of electric vehicles, since management notes that demand for Nemak's core powertrain products could materially decline as ICE volumes fall, potentially reducing revenues if electrification progresses faster than Nemak's EV-focused order book ramps up.
  
• Nemak faces long-term margin pressure due to its reliance on cost-containment efforts and favorable contract negotiations, with management admitting recent results were bolstered by one-off or temporary pricing and commercial adjustments, which may prove unsustainable and could lead to reduced earnings if those conditions normalize.
  
• The company's total sales volumes have structurally declined from nearly 50 million units a decade ago to under 38 million in 2025 guidance, showing a persistent negative trend in unit sales that, if unaddressed by successful EV or structural product growth, could erode total revenues and limit future EBITDA growth.
  
• Heavy customer concentration, particularly among major OEMs and in traditional ICE platforms, exposes Nemak to abrupt downturns in volumes or pricing power if any large clients change sourcing strategies or reduce orders, which could lead to significant volatility in both revenue and net income.
  
• Competitive and regulatory risks persist, as the European market is experiencing lower production volumes, macroeconomic uncertainties, and export declines, while stringent emissions rules and industry shifts toward composites or advanced materials may require Nemak to incur higher capital expenditures and operational costs, thereby compressing net margins and straining free cash flow over time.

Valuation

• The assumed bearish price target for Nemak S. A. B. de C. V is MX$4.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Nemak S. A. B. de C. V'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 MX$9.5, and the most bearish reporting a price target of just MX$4.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $5.3 billion, earnings will come to $120.8 million, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 22.1%.
  
• Given the current share price of MX$3.12, the bearish analyst price target of MX$4.0 is 22.0% 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.