Valeo shares jump on BofA upgrade

Investing.com -- Shares of Valeo (EPA:VLOF) rose on Thursday following an upgrade by analysts at BofA Securities.

At 4:18 am (0818 GMT), Valeo was trading 5.8% higher at €9.12.

BofA upgraded Valeo’s investment rating to “buy” from “neutral” and raised its price objective to €14.00 from €12.00 per share.

This revision came after analysts cited improving earnings potential, successful business strategies, and favorable market conditions as key drivers for future growth.

Valeo's earnings have seen a downturn in recent years, losing nearly 70% of its value since the pre-COVID period.

“However, we think earnings are inflecting and believe it’s time to turn more positive,” said analysts at BofA.

The brokerage raised its estimates by = 11%, driven by robust growth in critical areas like Advanced Driver Assistance Systems (ADAS), Lighting, and ePowertrain.

These areas are positioned for strong expansion as the demand for electric vehicles (EVs) and high-tech automotive solutions grows.

BofA analysts also forecast a substantial improvement in Valeo's profit margins, particularly in 2025-2026, driven by key operational changes.

The company's research and development (R&D) expenditure has peaked, and accounting adjustments, including provisions and capitalizations, are declining.

These adjustments are expected to increase margins by 160 basis points by 2026. Furthermore, restructuring efforts and favorable commercial terms in new contracts set to start in 2025 are expected to contribute to greater profitability.

“We expect Valeo to reduce its gross R&D expenditure by around €200m in FY25E and see restructuring related cost savings of €100m in FY25 and €50m in FY26,” the analysts said.

Valeo's strong order wins in high-growth sectors, including ADAS and Lighting, present significant opportunities.

Despite previous concerns over its exposure to the Chinese market and challenges in Battery Electric Vehicle (BEV) penetration, BofA analysts believe these issues have largely been addressed.

The company is now better positioned to benefit from increasing BEV adoption, particularly in Europe, as stricter CO2 emission targets prompt automakers to invest heavily in EV technology.

The stock trades at a discount compared to its historical valuation. On a forward-looking basis, Valeo is trading at a 30% discount to its 3-year, 5-year, and 10-year historical averages, even after accounting for provisions and working capital adjustments.

Analysts believe that the market is undervaluing Valeo’s recovery potential, making it an attractive investment.

BofA Securities projects that Valeo's earnings per share (EPS) will rise significantly in the coming years. For 2025, they forecast an EPS increase of 88.6%, from €1.15 in 2024 to €2.17.

Similarly, Valeo's free cash flow is expected to jump to over 20%, with a projected free cash flow yield exceeding 28% by 2026. This robust financial outlook supports the newly raised price target and reinforces the positive sentiment surrounding the stock.

This article first appeared in Investing.com