European suppliers such as Faurecia and Valeo have a five- to 10-year window for above-average organic growth because of automotive megatrends such as the race to produce vehicles that can drive themselves and to build cars that are more fuel efficient, according to a report.
"For the manufacturers, some of these trends may represent an opportunity to differentiate their products, but they are also a huge additional cost," report author Edoardo Spina of Exane BNP Paribas told Automotive News Europe. "For suppliers, however, the cost is not their problem and they can reap the benefits of investment in technologies, for example to improve fuel efficiency, or in autonomous driving or electric drivetrains."
Spina said that French exhaust and interiors maker Faurecia will outperform the sector and has "the most upside to surprise." He points out that Faurecia "is the biggest beneficiary of deflating plastics prices: every 10 percent drop in price is worth about 3 percent of earnings before interest (EBIT) upgrades."
He also identified Valeo as being "the stock most exposed to key automotive megatrends in powertrain and assisted driving," and forecast the company will enjoy 10 percent a year organic growth over the next two years.
The other megatrends Spina sees include rising demand for active safety features in vehicles and the increased use of common platforms.
Aside from the pending $13.5 billion bid by German supplier ZF Friedrichshafen for U.S. rival TRW Automotive Holdings Corp., due to be decided on by EU anti-trust regulators on by Feb 26, Spina does not anticipate significant further consolidation amongst European suppliers, although that may happen in such areas as software and laser technology.
He believes organic growth offers European suppliers the greatest opportunities, noting that the recent significant drop in the price of oil affords them "an unexpected and underestimated tailwind."
While metal purchases offer no potential upside for suppliers because they are usually nearly fully hedged via pass-through clauses with automaker customers, this is not the case with plastics. Yet the 40 percent decline in the oil prices over the last 12 months is not evident in the current price of plastics.
In his report on suppliers Spina wrote: "We would typically expect a $10 move in oil to be associated with a circa 40 to 50 euro/metric ton move in our plastics index. However, the recent circa $55 move in oil has only seen a 125 euro move in the price of plastics against the 450 to 550 euros we would typically expect."
Spina told ANE that oil prices may have been somewhat distorted by trading in thin volumes in December, so it appeared plastics producers were waiting to see what would happen next. Plastic prices, however, would begin to catch up with the decline in oil prices within the next month or so, he added.
The analyst believes that because plastics remain unhedged suppliers will be able to keep at least a third of the benefits of this, passing on the rest to their customers. "Crucially, input costs for OEMs are also falling, leaving upside for suppliers to retain a higher share of their savings," Spina wrote.
A 45 percent premium in the enterprise value to sales currently enjoyed by European suppliers over automakers shows that investors are well aware of the increased growth opportunities for suppliers over the next few years.