Bad Day at the Office for the Ball Bearings Billionaire

(Bloomberg Gadfly) -- When investors are utterly convinced of a business’s long-term prospects, sometimes they’ll forgive a duff quarter. Unfortunately, Schaeffler AG isn’t one of those companies.

On Monday evening, the maker of bearings and other automotive and industrial components cut its full-year cash flow projections by 17 percent, citing pricing pressure and higher R&D costs associated with the switch from combustion to electric vehicles.

The shares tumbled 11 percent, dipping briefly below the price at which the company placed shares in a 2015 initial public offering, an event that cemented the Schaefflers' position as one of Germany's wealthiest families. Chairman Georg Schaeffler ranks 40th on Bloomberg's billionaires index, with a net worth of roughly $20 billion (though probably somewhat less after today).

Bad Day at the Office for the Ball Bearings Billionaire

You can’t blame shareholders for being skittish. Schaeffler's expertise lies in precision mechanical components but some of these could be made redundant by the rise of electric vehicles. Analysts at UBS think 50-75 percent of bearings in a conventional car will disappear in a battery vehicle. 

Volkswagen, Schaeffler's biggest customer, now says electric vehicles will be up to one-quarter of total sales by 2025 and its rivals have set ambitious targets too. But that technology shift comes as VW attempts to slash costs to help stem an enormous cash outflow after the diesel emissions scandal. Meanwhile, fears that cities could ban diesel cars from the streets, has also begun to curtail diesel demand in Europe.

So far Schaeffler's top line hasn't been affected by all of this, but that's not terribly surprising: battery vehicles are still a tiny fraction of global vehicle sales. The company projects about 4.5 percent sales growth this year, treble the rate at which global car sales are expected to expand.

Nor is Schaeffler oblivious to the tech threats. It's investing heavily to boost sales of technology for hybrid and electric vehicles -- it makes electric axles and wheel hub drives, for example. In theory this should let it boost the amount of technology it contributes to each car. That's especially true for hybrid cars because these combine elements of electric and combustion engine tech. Yet in the short term those investments depress profit. R&D expenses will probably be about 6.5 percent of sales this year.  

Higher costs seem pretty certain but success less so. This is a very competitive field and, until proven otherwise, investors are inclined to think that Schaeffler's fat profit could be endangered. Following Tuesday's plunge, the stock trades on  less than 8 times estimated earnings, whereas electric component specialist Valeo fetches 14 times. (I wrote about Valeo here).

Bad Day at the Office for the Ball Bearings Billionaire

Schaeffler’s predicament isn’t unique, of course. The entire industry is struggling to balance the needs of today (more efficient combustion engines) with the demands of tomorrow (electric). It’s fiendishly difficult to get right, not least because carmakers keep changing their minds about which tech will win out. 

With those doubts in mind, it's natural for investors to care about short-term targets being missed.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

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To contact the author of this story: Chris Bryant in Berlin at cbryant32@bloomberg.net.