Investing.com -- Barclays (LON:BARC) has cut its ratings on Porsche, Mercedes Benz Group AG (ETR:MBGn), and Stellantis (NYSE:STLA) as the European auto sector continues to grapple with deepening challenges. The revisions come after significant profit warnings and a sharp correction in the sector, which has been under pressure due to multiple structural and cyclical risks.
Dr Ing hc F Porsche AG Preferred (ETR:P911_p) was downgraded to Underweight, with Barclays reducing its price target to €35.
The downgrade comes in the context of warnings from other German automakers, including Volkswagen (ETR:VOWG_p) and BMW (ETR:BMWG), which have been hit hard by market forces. Barclays highlighted ongoing risks such as margin pressure, saying that while Porsche's setup is strong into 2025, "execution risks" and "high relative valuation" remain as concerns.
Mercedes-Benz (OTC:MBGAF) was downgraded to Equal Weight with its price target cut to €65. The report pointed to concerns about the "new normal" for the company's margins and its auto free cash flow (FCF) as key factors in the downgrade.
Lastly, Barclays reduced its Stellantis rating to Equal Weight and the price target to €12.5 in the wake of a major profit warning from the automaker.
The firm acknowledged that "€6 billion mid-term FCF is not inconceivable” for Stellantis, however, the automaker faces challenges from a tougher market environment, including cost pressures and competition, which have led to lower expectations for earnings and profitability.
Analysts said it downgraded all three stocks despite their strong screenings on FCF and Total Shareholder Return (TSR) even after a big earnings reset.
They note that "the magnitude of warnings in the shortness of time will still require some time to digest on part of the market, in our view, before getting comfortable with "new normal" mid-term EBIT margin and FCF levels to allow a genuine re-engaging with these names.”
“In the meantime, we think any near-term strength will be more likely viewed as a "pain trade" by the market,” analysts added.
Barclays also remains cautious on the European auto sector overall. While the sector has seen large valuation resets, allowing for attractive free cash flow and total shareholder return potential for some automakers, the report stresses that investors cannot ignore "structural risks" such as "China profit pool erosion, Co2 compliance costs, BEV transition," and tariff risks between the EU, China, and the US.
Still, analysts upgraded the EU Autos & Parts sector rating to Neutral from Negative, saying they "don't think it is opportunistic to remain Negative on EU Autos at this point after the sharp correction."