BofA Securities double-upgrades Schaeffler AG to "buy" on strong mid-term outlook

Investing.com -- BofA Securities analysts have upgraded Schaeffler AG (ETR:SHA_p)’s (ETR:SHA0) rating to "buy" from "underperform", raising the price objective to €5.50 from €4. 

Shares of the German company were up 7.3% at 05:18 ET (10:18 GMT).

This comes as the brokerage anticipates bullish mid-term targets for the company, set to be announced at its Capital Markets Day (CMD) on September 16.

Analysts at BofA Securities expect Schaeffler to roughly double its group adjusted EBIT between 2025 and 2028. 

Additionally, free cash flow is projected to increase to approximately €800 million per annum by 2028, with earnings per share expected to reach at least €1, specifically €1.15 in 2028, and dividends per share of €0.5 or more by the same year.

The note flags the full integration of Vitesco Technologies into Schaeffler’s estimates, which is expected to result in higher revenues, initially lower EBIT in 2025 and 2026, followed by higher EBIT in 2027.

This integration transforms Schaeffler, with the E-Mobility business emerging as a significant growth driver, positioning the company as a leader in electric drivetrains. 

While this segment may initially impact earnings, BofA Securities expects it to more than offset the decline in the traditional powertrain business in the long term.

BofA Securities analysts also emphasize Schaeffler’s diversified business model, termed the "Three Hedges concept," which is seen as a source of stability and earnings growth. 

The first hedge involves the balance between internal combustion engine (ICE) and electric vehicle (EV) technologies. 

Schaeffler’s powertrain business, currently accounting for about 40% of group revenues, is in structural decline but maintains an EBIT margin exceeding 10%, serving as a consistent cash and earnings contributor. 

In contrast, the E-Mobility business is the growth engine, with a projected sales compound annual growth rate of over 10% from 2024 to 2028.

The second hedge is the diversification between original equipment manufacturer (OEM) automotive supply and repair services. 

Schaeffler’s "Vehicle Lifetime Solutions" business, which supplies vehicle and powertrain repair kits, boasts an approximate 15% EBIT margin. 

This stable business currently contributes about 13% of group revenues and roughly 50% of adjusted group EBIT, with rising vehicle parc age indicating increasing repair demand.

The third hedge lies in the balance between the industrial and automotive sectors. The Industrials segment, with approximately a 7% EBIT margin, accounts for 30% of sales and about 50% of group EBIT in 2025. 

This segment presents promising growth potential, particularly in areas like defense and humanoid robotics, which analysts at BofA Securities analyzed in detail.

BofA Securities’ adjusted EBIT consensus is now aligned with Schaeffler’s for 2025 and 2026, while exceeding it for 2027 and 2028, reflecting the anticipation of robust mid-term targets. 

The valuation approach has shifted from a target price-to-earnings valuation to a sum-of-the-parts methodology to better account for the "Three Hedges" concept. 

The brokerage considers the transition year of 2025 as a buying opportunity, with the upgrade supported by discounted cash flow analysis.