European autos have the biggest upside to analysts’ price targets, yet they are also the cheapest sector out there as investors price tougher times ahead.
(Bloomberg) — European autos have the biggest upside to analysts’ price targets, yet they are also the cheapest sector out there as investors price tougher times ahead.
Carmakers have been under pressure for nearly two years as slowing demand, lower growth in China, fierce competition in electric vehicles and eroding pricing power build into a wall of worries for the sector.
That’s also reflecting in valuations: the Stoxx 600 autos and parts index’s forward price-to-earnings ratio is hovering around 5.3 times, near the bottom of a 17-year range and about a 60% discount to the broader market.
“The sector is priced to lose substantial market share in upcoming years and, if correct, this would ultimately signal the end of the road for one of Europe’s most important industrial sectors,” wrote Bernstein analysts including Daniel Roeska in a note last week.
“Market valuations imply a free-cash-flow mean-reversion of -22% and long-term growth of 1.5%.”
But the market is “too pessimistic,” according to the Bernstein analysts, as it assumes operational improvements achieved in the past few years will erode, while long-term growth will be subdued.
Despite challenges, they see some value, with outperform ratings on Mercedes-Benz Group AG and Renault SA, and a market-perform view on BMW AG, Stellantis NV and Volkswagen AG. While the latter is “overvalued,” both Stellantis and Renault are “essentially priced to go out of business,” they said.
On average, sell-side analysts are holding a positive view.
The Stoxx 600 autos and parts is the subindex with the most upside seen over the next 12 months at 31%. Earnings forecasts have been on the rise this year, reaching a record high in August, but have stalled since, with cracks in the bull case finally showing in estimates.
Last week, UBS downgraded Volkswagen and Renault to sell on intensifying competition from Tesla Inc.
and Chinese rivals. Earlier this month, Tesla announced a revamp of its Model 3, while again slashing prices on several variants, increasing fears of an EV price war. New-model announcements at the IAA Mobility car show in Munich haven’t been a strong catalyst so far.
Meanwhile, economic data is not on carmakers’ side.
European PMIs haven’t shown any sign of recovery, which could weigh further on the sector, while slowing growth in China is seen as a major issue for exposed carmakers like BMW and Porsche AG, according to Citigroup Inc.
analysts.
“Autos look cheap on a range of valuation measures, such as price-to-book, as well as on EV/Ebitda,” said JPMorgan Chase & Co. strategist Mislav Matejka in a note on Monday.
“However, the sector is strongly correlated to activity momentum, and could be hurt as PMIs stay subdued.”
–With assistance from Chiara Remondini.
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