(BFM Bourse) – The American investment bank considers that the operating environment is improving for automotive suppliers, in particular for Forvia and Valeo. It raised its advice on the two companies by two notches, thus switching to the purchase on both stocks.
The last few years have been difficult on the stock market for automotive suppliers. The sector had to deal with the new WLTP certification standards, which disrupted production plans, then the pandemic broke out, leading to a plunge in volumes and consequent logistical difficulties. Not to mention the inflation of raw materials, energy and wages. However, equipment manufacturers have fewer levers than manufacturers to raise their prices and thus pass on inflation, their prices being contractually defined, which obliges them to negotiate with their customers.
Result: their margins have melted, and their stock prices have suffered, Valeo and Faurecia losing over five years each more than 60%. More broadly, equipment manufacturers have seen their market capitalization contract by 10% over the last three years, while that of manufacturers has increased by 60%, according to Jefferies.
However, the investment bank believes that “the planets are now better aligned” for auto parts manufacturers, and raised its advice on Valeo and Faurecia by two notches, going from “underperformance” to “buy” on each. Which brings the two shares, Valeo taking 3.7% and Faurecia 5.7% around 2:45 p.m.
A dark cycle coming to an end
In its sector note, Jefferies considers that all equipment manufacturers could still have difficulty passing on increases in energy costs and wages, which could potentially lead to disappointments. But, on the other hand, on the demand side, the outlook is encouraging. Since the start of the year, sales volumes have been a positive surprise in both Europe and the United States, notes Jefferies.
“Inventory replenishment should continue to support production prospects and the easing of supply chain constraints will improve production efficiency,” the consultancy also anticipates. “The post-Covid cycle of declining results seems to be coming to an end”, he considers as well.
It is in this context that Jefferies is therefore more positive on Faurecia and Valeo.
The first, now united with the German Hella within Forvia, has “one of the highest operational levers” among the securities in the sector followed by the bank, which should support its deleveraging, underlines the financial intermediary. Jefferies notably raised its adjusted operating profit forecast by 6% to 1.48 billion euros for 2023, nevertheless falling below the consensus.
Valeo at a turning point?
The bank considers that these two elements – certainly high debt but destined to drop sharply and strong operating leverage – ideally place Faurecia (and therefore Forvia) among the equipment manufacturers to benefit from the improvement in the operating environment. In the longer term, Faurecia offers an attractive proposition in terms of growth, with significant order intake recently, continues Jefferies.
As for Valeo, the financial intermediary believes that the results of the first half should mark an inflection point, with, then, an acceleration of both the recovery of margins and the outperformance of sales compared to global automobile production. Jefferies also points out that order intake for the group headed by Christophe Périllat accelerated last year, with new contracts which are in line with the company’s medium-term objectives in terms of profitability (6.5% margin operational in 2025, compared to 3.2% in 2022). In addition, the company’s price-to-expected earnings (P/E) ratio is well below its long-term average, the bank added.
It should be noted that in addition to these two equipment manufacturers, Jefferies is also buying tire manufacturer Michelin and the Swedish safety belt and airbag specialist Autoliv.
Julien Marion – ©2023 BFM Bourse