Electrification And Nearshoring Will Drive Lightweight Aluminum Demand

Key Takeaways

• Rapid expansion in EV components, digitalization, and manufacturing efficiency positions Nemak for higher margins and sustained outperformance across varied auto market cycles.
  
• Strategic global presence, innovation in sustainability, and strong OEM partnerships drive above-average revenue growth, premium pricing, and increasing market share.
  
• Heavy reliance on legacy engine components and high leverage heighten risk amid slowing EV growth, operational headwinds, and fading one-time profit gains.

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.

• Analysts broadly agree that Nemak can benefit from the electrification of mobility through its expansion into EV battery trays and structural components, but this likely underestimates the increasing pace of OEM electrification commitments and Nemak's rapid ramp-up-supported by strong execution in strategic regions, their state-of-the-art Czech facility is already operating at high volumes and poised to generate outsized EV-driven revenue and margin upside.
  
• The consensus expects margin improvement through cost reductions and automation, but Nemak's accelerating roll-out of high-pressure die casting efficiencies and digitalization across its global footprint could drive structural margin expansion and persistent outperformance on EBITDA per unit, reducing cost volatility regardless of automotive cycles.
  
• Nearshoring and regionalization are just gathering steam, but Nemak's entrenched North American presence, tariff immunity, and USMCA compliance position it to win disproportionate new business as OEMs accelerate local sourcing-supporting above-industry-average revenue growth and long-term order book stability.
  
• The company's growing commercial relationships with leading Chinese OEMs, combined with outperformance in Rest of World regions such as China and India, mean Nemak is on the cusp of significant market share gains in the fastest-growing global auto markets, boosting volume growth beyond current analyst models.
  
• Through innovation alliances-such as its low-carbon aluminum partnership with Hydro and best-in-class supplier engagement scores-Nemak is rapidly building a reputation as the go-to partner for sustainability, laying the foundation for premium pricing, higher gross margins, and increased wallet share from customers facing tightening environmental mandates.

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

Assumptions

• This narrative explores a more optimistic perspective on Nemak S. A. B. de C. V compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Nemak S. A. B. de C. V's revenue will grow by 4.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -1.7% today to 2.8% in 3 years time.
• The bullish analysts expect earnings to reach $156.2 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 bullish analyst cohort, the company would need to trade at a PE ratio of 15.5x 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

• Nemak's business remains heavily dependent on internal combustion engine components, with management acknowledging ongoing volume declines from nearly 50 million to 37–38 million units over the past decade, which risks continued erosion of revenues as secular electrification accelerates and legacy ICE volumes structurally decline.
  
• Management highlighted that EV order book growth has slowed and project delays by OEM customers are resulting in deferred or reduced CapEx, illustrating potential for long-term stagnation in top-line growth as the pace of electrification adoption becomes more uncertain and highly volatile.
  
• The company maintains high leverage with net debt standing at 1.61 billion dollars and a net debt-to-EBITDA ratio of 2.5x, and while reducing, this leaves Nemak exposed to future interest rate increases or tighter credit conditions that could significantly impact net earnings through higher interest expenses.
  
• The flat to declining European revenues, noted operational headwinds in Europe including softer production volumes, economic uncertainty, and reduced exports, point to the risk of deteriorating regional profitability and cash flow, especially in the face of tighter environmental regulations and shifting trade dynamics.
  
• Management admits that recent EBITDA strength includes one-time benefits from commercial negotiations and favorable pricing adjustments; with volume declines, normalization of these factors is expected in coming periods, threatening EBITDA margins and net income as underlying business fundamentals may not support sustained profitability at current levels.

Valuation

• The assumed bullish price target for Nemak S. A. B. de C. V is MX$9.5, which is the highest 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be $5.7 billion, earnings will come to $156.2 million, and it would be trading on a PE ratio of 15.5x, assuming you use a discount rate of 22.1%.
  
• Given the current share price of MX$3.12, the bullish analyst price target of MX$9.5 is 67.2% 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.