Investors are currently pessimistic about the future of the European automotive sector. The Trump administration’s trade policy has shaken up stock valuations, while there remains strong competition from Chinese EV manufacturers like BYD. The electric vehicle revolution in Europe has also stalled amid shifting government climate targets, changing consumer habits and problems with charging infrastructure.
Despite the current threats to the sector, many of its key stocks are screening as undervalued and the current pessimism is overdone, says Rella Suskin, equity analyst at Morningstar.
Trump Tariffs Will Damage EU Car Stocks
Europe is awaiting concrete news of Trump’s tariff plans on April 2. While there is still uncertainty about tariffs on US car imports, Suskin notes the likely “substantial” impact of permanent tariffs on the European car sector. She says that the companies most affected by this measure would be Italy’s Stellantis STLAM and BMW BMW, Mercedes-Benz MBG and Volkswagen VOW in Germany.
“We assume a reduction in their fair value if the 25% tariff is imposed permanently,” she adds.
European car manufacturers have different exposures to this trade policy, with some already having a manufacturing presence in North America, which would mitigate some of the direct effects.
Even if some companies assemble their cars in their US plants and are therefore not directly affected by the tariffs, it is likely that many of the components used are imported from Mexico and Canada, and therefore still subject to the tariffs.
And being forced to relocate production lines is likely to increase costs for European manufacturers, with a negative impact on profit margins.
“The White House’s decision not to impose these tariffs with immediate effect is aimed at allowing the relocation of production lines to the United States. This strategic decision will result in an increase in capital expenditure of over two billion euros over the next two years, as well as higher operating costs due to the higher labor cost in the United States,” adds Suskin.
China’s EV Success Story
The trade war triggered by Donald Trump, however, is only the latest in a long series of problems that have been weighing on European car companies for years.
One of the main problems has been excess production capacity and the high fragmentation of the market. The pandemic, which triggered a change in working and commuting patterns, and the growing competition from Chinese manufacturers, have only made the situation worse. Five years on, annual car sales in Europe are still below pre-Covid levels, meaning manufacturers have to absorb high fixed production costs as sales fall.
European manufacturers, unlike their American counterparts, have been more severely penalized by the success of Chinese car manufacturers. While the United States has managed to keep the competition from Chinese electric vehicles at bay, imposing 100% tariffs on imports, the European Union arrived at this decision later and imposed lower tariffs.
Europe’s Car Sales to China Have Slumped
This trade flow also goes the other way, with European manufacturers also selling models into the lucrative Chinese market. Companies like BMW rode the wave of the Chinese automotive boom and demand for European luxury goods as the economy prospered. Since then, China’s economy has slowed and the sales volumes of European companies in China have collapsed, with a significant impact on profits. Beijing has also ploughed money into promoting “national champions” and the share of domestically made EVs has rocketed.
“The Chinese government has acted as a large customer of electric vehicles, enabling companies in the country to achieve significant economies of scale, supporting the charging infrastructure needed for electric cars and financing the battery industry, which is now able to produce at very attractive unit costs,” Suskin says.
Can the EU Save Europe’s Car Makers?
What about the Industrial Action Plan announced by the European Commission at the beginning of March?
Suskin says the relaxation of the deadlines for meeting European standards on CO₂ emissions from cars and vans should save European manufacturers billions of euros.
But she thinks the other European Commission proposals are lacking in detail, timing and regulatory application.
More importantly, they can’t bridge the gap in terms of competitiveness with Chinese producers: “Although European manufacturers have solid budgets to allocate to new technologies, they cannot compete with the strength of long-term strategic planning at a national level and coordinated along the entire value chain, as is the case in China,” says Suskin.
She notes that in Europe the creation of recharging networks has been largely left to the private sector; Europe’s largest battery producer and flagship for the region’s EV push, Northvolt, collapsed at the end of last year.
Automotive Stocks Are Depressed
Despite these obvious challenges, market valuations are out of kilter with reality, Suskin says. Current market valuations imply that European car stocks will no longer be able to generate cash flow in 10 years’ time, she adds.
Still, the challenges ahead are obvious, Suskin says. To keep up with global competition, Europe’s car giants will have to spend more.
“In our assessment of European automotive stocks, we take into account the increased fragmentation of the market, which translates into higher price competition and therefore downward pressure on profit margins. We believe that European car manufacturers will have to maintain a higher level of investment in order to retain their market share.”
But stock valuations have significant upside from current depressed levels.
“Taking all these elements into account in our forecasts, we continue to see a significant margin of appreciation for stocks in the sector compared to current share prices,” says Suskin.
Which Car Stocks Are Undervalued?
All the stocks covered by Morningstar’s analysis, with the exception of Ferrari, are trading at discount rates of between 30% and 60%.
Although the margin of appreciation is substantial for almost all the shares covered by Morningstar, Volkswagen, Mercedes-Benz and Renault are those trading as the most undervalued.
Key Morningstar Metrics for Renault
- Fair Value Estimate: €85.00
- Morningstar Rating: ★★★★★
- Economic Moat: None
- Morningstar Uncertainty Rating: High
Morningstar’s Suskin points to the excellent capital allocation capabilities of the French company.
“To compensate for the lack of economies of scale, Renault has increased its use of partnership or collaboration agreements to share fixed costs, such as R&D expenses, while at the same time taking action to reduce its production base.
“Renault has an operating margin higher than or in line with that of competitors who can count on a much higher production scale such as Volkswagen. We are convinced that Renault’s current market price is also weighed down by the underperformance of Nissan, in which the French company holds a 15% stake, and that the sale of this stake would be a positive catalyst for the share price.”
Key Morningstar Metrics for VW
- Fair Value Estimate: €264.00
- Morningstar Rating: ★★★★★
- Economic Moat: None
- Morningstar Uncertainty Rating: High
Morningstar analyst Suskin says: “Although Volkswagen is rightly penalized by the market due to its poor execution, inefficient capital allocation, as well as the large shareholding of the state of Lower Saxony, which has contrasting objectives with those of shareholders, we believe that the share price does not reflect the value of the company at all as Volkswagen’s holdings in Porsche and Traton alone are equivalent to the current share price of the entire group, which means that the market recognizes a negative value for Audi, Lamborghini, the Volkswagen, SEAT and Cupra brands and for the financial services segment.”
Key Morningstar Metrics for Mercedes-Benz
- Fair Value Estimate: €106.00
- Morningstar Rating: ★★★★★
- Economic Moat: None
- Morningstar Uncertainty Rating: High
“Mercedes-Benz stock has lost almost 11% in the last 12 months, penalized by the negative numbers published during the year. While the near-term outlook is worse than expected, longer-term expectations are in line with the company’s strategic plan of improving profitability from 2027 onwards, following the launch of more products in 2025 and 2026. In addition, Mercedes-Benz may decide to monetize its non-strategic stake in Daimler Truck to fund a share buyback plan.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
