European autos have the biggest upside to analysts’ price targets, yet they are also the cheapest sector out there as investors price tougher times ahead.
Carmakers have been under pressure for nearly two years as slowing demand, lower growth in China, fierce competition in electric vehicles and eroding pricing power build into a wall of worries for the sector. That’s also reflecting in valuations: the Stoxx 600 autos and parts index’s forward price-to-earnings ratio is hovering around 5.3 times, near the bottom of a 17-year range and about a 60% discount to the broader market.
But the market is “too pessimistic,” according to the Bernstein analysts, as it assumes operational improvements achieved in the past few years will erode, while long-term growth will be subdued. Despite challenges, they see some value, with outperform ratings on Mercedes-Benz Group AG and Renault SA, and a market-perform view on BMW AG, Stellantis NV and Volkswagen AG. While the latter is “overvalued,” both Stellantis and Renault are “essentially priced to go out of business,” they said.
Last week, UBS downgraded Volkswagen and Renault to sell on intensifying competition from Tesla Inc. and Chinese rivals. Earlier this month, Tesla announced a revamp of its Model 3, while again slashing prices on several variants, increasing fears of an EV price war. New-model announcements at the IAA Mobility car show in Munich haven’t been a strong catalyst so far.
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