November 17, 2022

Schaeffler: committed to the future of cars

Schaeffler: committed to the future of cars

We remain in Germany for yet another week in our blog as we have just received our latest SDAX Top 10 list! Among several Large and Extra-Large companies (by Obermatt criteria) available there, we stumbled across a rather interesting name: Schaeffler.

It is interesting for several reasons. As a car parts manufacturer, we expected the stock to be at a higher price level, but its Obermatt Value rank is at 93, making it 93% cheaper than all its peers at Obermatt. Also, a continuously high dividend yield makes the company interesting for dividend investors. With their international operations, we are interested in looking deeper and considering the stock for our weekly pick.

Even though we believe that the ultimate future of commuting lies in better public transit for all, and naturally so does the majority of Obermatt, especially being Swiss, we mustn’t forget this specific industry: personal cars are essential for making the large part of the world moving. The switch to electric and hydrogen is imminent, but parts are still needed for cars operating on renewables too. Schaeffler recently announced firing up to 1300 employees worldwide due to lower demand for combustion engine parts, though. Luckily for them, they aren’t focused solely on that like some of the competitors and they can reorganize and grow in other areas of production.

PRO: The following three points speak for a buy:

  1. Very good value: with Obermatt Value rank 93, the company is 93% cheaper than its competitors. Also high dividend yield of 7,9%, which also reflects in the Obermatt Dividend Yield rank of 98.
  2. Car parts companies shouldn’t suffer much from the transition towards renewables. They should reorganize and improve the production of mechanical parts which are still needed in electric and hydrogen powered automobiles. We believe Schaeffler will be able to do so in the future by investing into new production technologies and materials as they already do - for example their most recent acquisition of a ceramics components producer Ceraspin.
  3. Schaeffler invests a lot in new materials and production methods research, which makes us believe that they will soon be ready to tackle the modern car parts world. They have already secured over 3.2 billion Euros of new e-mobility projects and are building a new modern facility of more than 8.000 square meters in Bühl. Another new plant is being built to accommodate production of electric motors and several new car parts made of recycled materials.

CONTRA: The following three points argue against it:

  1. Bad future of combustion engine powered automobiles, which also reflects in layoffs at Schaeffler’s engine divisions worldwide. In our opinion, this means that the company wasn’t quite ready for the transition and wasn’t able to properly train their employees for new production lines, or wasn’t able to recognize the rising demand in other areas.
  2. Obermatt Leverage rank of 43, which is on the lower side and means that the company has more debt compared to their competitors.
  3. You may argue that personal automobiles don’t stand a chance in the future, but that may not be the case - at least anytime soon. WIth the switch to cars powered by renewables with zero emissions, they are here to stay for a longer period of time. According to a study by MIT, car use in Europe will plummet 12% by 2050, even with making them green, with that trend expected to continue.

In our opinion, the pros here in the case of Schaeffler are slightly stronger than the cons. The company may be hit with a changed demand which they weren’t able to recognize recently, but that doesn’t mean they won’t do better in the future. This is why we buy it for the Obermatt Wikifolio.

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