On Tuesday, UBS made an adjustment to its stance on Schaeffler AG (SHA:GR) (OTC: SFFLY) stock, shifting the rating from Sell to Neutral. The firm also revised its price target to €4.40, a decrease from the previous target of €4.90. The decision comes amidst a period of cautious investor sentiment towards the company until there is more clarity on its merger with Vitesco Technologies (VTSC).
UBS noted that the visibility on vehicle production is volatile, anticipating no year-over-year growth for the fiscal year 2024. Europe, accounting for approximately 45% of Schaeffler's revenue, is expected to experience a significant decline, which will impact suppliers already struggling with inflation and increased research and development costs.
Schaeffler has been investing in its electrification portfolio, both organically and through its association with Vitesco, despite the slow growth in battery electric vehicle (BEV) sales in Europe, which have only increased by 1% year-to-date.
The firm also highlighted that Schaeffler is facing challenges due to higher costs and research and development expenses, which have risen by 10% in the first half of the year compared to the prior year. These factors have led UBS to reduce its earnings per share (EPS) estimates for Schaeffler, including Vitesco, for the fiscal years 2024 to 2026 by approximately 20%.
The reduction in estimates is mainly attributed to lower demand, increased costs, and higher R&D spending, particularly in the growing electrification business and the soft performance of the Bearing & Industrial Sales (B&IS) division, with noted weakness in China.
UBS's EPS forecasts for Schaeffler now stand 5-10% below the consensus for the fiscal years 2024 to 2026, factoring in a softer outlook for electrification, recovery in the B&IS segment, or benefits from the merger. The firm maintains a cautious approach given the current market conditions and the challenges faced by the company.
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