Investing.com -- Gestamp Automoción S.A. (BME:GEST) saw its shares fall over 5% following downgrades from both Barclays (LON:BARC) and UBS, as the analysts revised their outlooks due to several growing concerns regarding the company’s performance and market conditions.
UBS, in particular, has downgraded its rating for Gestamp, citing a challenging free cash flow outlook as a major factor. The revised price target for the stock was lowered to €2 from €2.8, reflecting a cautious stance in light of several headwinds facing the company.
A key issue identified by analysts is the subdued production levels in Western Europe, which accounts for roughly 35-40% of Gestamp’s sales.
With the latest projections from S&P indicating a continued decline in vehicle production in Europe—forecasted to fall 5.5% year-on-year in 2024, with a further drop of 1% in 2025—the outlook for the company’s performance in this region looks bleak.
This is compounded by the ongoing restructuring of Gestamp's U.S. operations, where the company is working through its Phoenix plan.
Despite some improvements, the U.S. business is still grappling with a much lower EBITDA margin of 4.6% in the third quarter, compared to the group average of around 10.5%.
In addition, the company is facing rising capital expenditures, which have increased to approximately 8% of sales, up from a historical level of about 7%.
UBS analysts expressed concern that these investments are not aligned with current levels of customer activity, as OEM projects have been delayed or downsized, rather than abandoned.
Furthermore, Gestamp’s ongoing capital expenditures are expected to continue, with financial expenses also rising due to higher interest rates.
The company’s debt maturing over the next couple of years adds to the pressure, as net interest expenses in the financial statements for FY23 have already climbed by approximately 35% year-on-year.
The company’s exposure to global OEMs—particularly German automakers and Stellantis—also remains a key vulnerability. Gestamp is heavily dependent on these manufacturers, who themselves are facing significant challenges.
With low demand and reduced projections for battery electric vehicles, Gestamp’s investments in this area over recent years may not yield the expected returns, as the market conditions for BEVs continue to struggle. Meanwhile, in China, which makes up about 15% of the company’s revenue, Gestamp faces increasing difficulties as global OEMs lose market share in the region.
UBS analysts have also revised their earnings forecasts, cutting estimates for FY24-26 by 25-30%.
The new figures now stand 15-30% below consensus for FY25-26, primarily due to expectations of lower revenue from strained OEM relationships and lower margins than previously forecasted.
UBS also holds a more conservative view on the overall market conditions, with concerns about call-off volatility, the ability to turn around North American profitability, and the company’s ongoing capital spending needs.
Barclays has also downgraded its stance on Gestamp, moving its recommendation to Equal Weight (EW) from Overweight (OW) and cutting its price target to €3.0 from €3.5.
Although Barclays acknowledges the management's commitment to improving free cash flow generation and the company’s balance sheet over time, analysts expressed disappointment over the lack of progress in Gestamp’s North American turnaround efforts.
Despite a favorable light vehicle production environment in the region, Gestamp’s Phoenix plan has failed to show clear signs of progress.
This ongoing uncertainty is compounded by the increasing threat of higher U.S./Mexico tariffs, which could disrupt the company’s strategy of moving production from Edscha facilities in the U.S. to Mexico.
Additionally, Barclays analysts raised concerns over the broader market environment, noting that the company’s investments in electric vehicles could be jeopardized by the softening momentum of battery electric vehicles.
With these risks in mind, Barclays now believes that 2024 may not be the final transition year for the company, and as such, they have adjusted their expectations accordingly.