Volkswagen’s decision to close at least three production plants in Germany and take a 10% pay cut to cut costs was the culmination of a sector that has become one of the most bearish on the European stock market, with the Stoxx Autos falling by 14.86. % so far this year, due to strong competition from Asian companies, able to market similar models at lower prices, and the burden posed by the transition to electric cars, which has not finished taking off. Europe, as the sales of these prototypes demonstrate.
The heavy investments undertaken by European manufacturers to adapt to the production requirements of electric cars, constrained by Brussels’ energy transition policies, have not yet translated into palpable benefits.
At Valentum, we remember that salary costs have become a burden for the sector in Europe, which has also lost the right to the quality of its models. “Tesla and the Chinese manufacturers, who were starting from scratch, seem to have obtained more efficient products that they can sell more cheaply. One of those reasons that is difficult to defend against is the cost of wages in Europe, the high number of people working in the sector and the lack of flexibility to adapt these models If we add to this that the great advantage of European manufacturers, which was the quality of their construction and the superiority of their engines, has disappeared. it is difficult for us to see improvements in business results“, explains Jesús Domínguez, co-director of the company, which is why they eliminated the Stellantis position months ago.
At Horos AM they focus on lack of efficiency of the European sector. “A vehicle from Skoda, Peugeot, Fiat or Seat was in competition with Japanese and Korean manufacturers, who manufactured at very low prices, such as Kia or Hyundai. But with electrification, Chinese vehicles have arrived which compete on price and directly attack the market. mass markett. The market needs to be restructured and it is not enough to simply impose tariffs on imports. Producing as is currently done in Europe is not efficient,” says company director Miguel Rodríguez, who warns that Volkswagen’s warnings about factory closures and mass layoffs are serious.
From Hamco AM, the management company founded by John Tidd, they consider that the European automotive sector offers an attractive long-term opportunity, since the price/book value of many companies is even lower than the minimums reached during the covid crisis and in 2008. “It is difficult for us to ignore such a depressed valuation. The recent decline in sales and profitability, following a period of inventory restocking following the semiconductor shortage, suggests that the sector may be experiencing a temporary winter. The duration of this period is uncertain, but certain factors such as market consolidation suggest a possible recovery and we would like this consolidation to continue, they emphasize.
Does this mean they are a buying opportunity or are they becoming a value trap for investors? In a recent interview with elEconomista.es, Carlos Val-Carreres, head of MyInvestor Value, highlighted that they had rather become the latter. “I am not in a position to know whether the automobile brands are manufacturers with a financial company or whether they are banks which, to provide financing, sell cars. And at a time of such an important transition from the thermal engine to the “electric, we will have to see what happens with the residual values”, he noted.
An opinion that contrasts with that of Iván Martín, director of Magallanes Value Investors, who defended last year that the deepest value was that of automobile companies. “If we speak in terms of pure valuation of parameters, in Europe the technically most valuable sector is that of automobiles and components. The market is not that it does not see it, it is that he prefers not to be there If you have a PER 2 “For companies, without risk of bankruptcy because they have a lot of cash, moving to PER 3 is a 50% revaluation,” he assured. .
Opportunities
But as in all sectors, fund managers prefer to discriminate based on value and are finding attractive opportunities in the automotive sector thanks to falling stock prices. At Cobas AM, the manager of Francisco García Paramés, it is explained that they are found in companies present throughout the value chain, not so much directly with car manufacturers. “In fact, basically Cobas selection We have around 6% in the automotive and components sector. We are invested in European companies like Porsche, TI Fluid and Renault, and we are also present in Asian companies like Johnson Electric and Ichikoh,” explains Carlos González, director of investor relations of the manager.
Concerning Renault, he points out that, while other European manufacturers have adjusted their annual financial targets downwards, due to the market slowdown in Europe, the economic crisis in China and the drop in demand for electric vehicles, the company led by Luca de Meo remains firm in its forecasts for 2024. “It recently presented positive results, increasing its revenues, driven by the strong demand for its new models, and maintaining a leading position as the third brand in general terms and leader in the light utility vehicle segment,” says González.
At Panza Capital, Beltrán de La Lastra’s company, it is considered that although the time to invest in the sector is “uncomfortable”, it is also profitable, given the “extremely cheap” valuations offered by companies like Stellantis, which “is distinguished by its diversification”. and local production in the United States, where it makes 50% of sales, thus minimizing the risk of Trump tariffs, unlike German manufacturers. Excess inventory generated by the transition to new models, which is what we expect. are resolved by the end of the year, has led the company to very attractive valuations”, they emphasize.
Where some managers find more potential is in big brands. primelike Mercedes or BMW. At Horos, they have a stake in the latter because “the customer who pays for his car is ready to pay extra to have a vehicle with his characteristics”. For their part, in the first, they occupy a position at Muza Asset Management. “They have a very good product portfolio, although they also suffer from sales of exclusively electric vehicles, but in the rest of the categories (hybrid, thermal, vans) they are doing quite well,” says Luis Urquijo, managing director of the company.
The manager of the Muza fund, a replica of the SICAV of the same name, explains that the company has a very solid balance sheet, with cash in the industrial activity of around 28 billion euros (nearly 50% of the capitalization), which “This will not only allow them to manage the company calmly in a possibly more gloomy commercial environment, but it will also allow them to repurchase their own shares for an amount close to 10% of the capital, and they approve another next spring plans to be able to buy back another 10%, an operation which will ultimately result in very significant growth in earnings per share in the coming months.
In addition, explains the manager, Mercedes still owns 35% of Daimler Trucks, the truck subsidiary that they listed in 2021, “a stake which today is worth nearly 11 billion euros, so if we subtract from which capitalizes Mercedes, the 28 billion in cash and the 11 billion of the truck subsidiary, you buy the car sales activity plus the finances plus the light vehicles (vans) for a valuation of a little more than 21 billion, for an activity which generates cash per year of around 6 billion euros, or almost 30% profitability,” he underlines.
