(News Bulletin 247) – The automotive sector is ending a very difficult year in 2024 and 2025 promises to be extremely tumultuous. Against this backdrop, Bank of America delivered five “convictions” with four stocks to buy and one to sell.

The 2024 vintage was an “annus horribilis” for the automotive sector. Volumes and prices have suffered, several groups have announced restructuring (Schaeffler, Volkswagen, Valeo, Forvia, etc.), threats of customs tariffs have arisen in the United States and China and profit warnings have multiplied.

Among manufacturers, Volvo, Porsche, Aston Martin, Mercedes, Volkswagen, BMW and Stellantis were thus forced to issue a “profit warning”. Only Ferrari and Renault were able to maintain (or even raise for Ferrari) their objectives.

Moreover, these two groups are the only European manufacturers which should post a positive performance on the 2024 stock market, the first progressing for the moment by 34.9%, the second by 26.9%. Otherwise, the falls range from 14.5% (Mercedes) to 53.6% (Aston Martin). It’s not much better for equipment manufacturers who are also suffering from increased competition from Chinese groups. For example, the French companies Forvia, Valeo and Opmobility (formerly Plastic Omnium) are dropping 60%, 36.4% and 18.5% respectively over the whole of 2024.

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An “almost perfect storm”

Unfortunately, the year 2025 does not look much better. UBS explained in a recent note that the sector was facing “an almost perfect storm”.

“The pressure on prices, the loss of market share in China, the tightening of regulations on Co2 emissions, the risk of customs tariffs (from the Trump administration, Editor’s note) and the persistence of sluggish demand ( 2025 production excluding Chinese manufacturers is estimated at -1% year-on-year) should further reduce sector profits, despite the intensification of restructuring efforts,” explains the bank.

“The year 2024 has been difficult for most groups, with a series of warnings and weak stock price performance,” adds Bank of America. “The first quarter of 2025 is also likely to be difficult, due to Trump’s program on trade and customs duties, the (expected) weakness of the objectives for the 2025 financial year and the strikes in Germany” , she warns.

Trump, Co2 and Tesla

As usual, the American bank has listed five themes to watch next year, in particular vehicle launches, new products being necessary to stand out in a European market where sales growth will remain limited (+2.4% according to Bank of America).

The establishment also highlights a crucial issue for manufacturers but also for equipment manufacturers (because of the potential impact on production and costs): CO2 emissions. A clear turn of the screw will take place in 2025 with the tightening of European regulations known as “CAFE” (“corporate average fuel economy”). Bank of America believes that manufacturers will manage to respect the new maximum emissions thresholds and therefore avoid paying fines. But to do this, they will have to increase sales of electric vehicles and pass additional costs. This will have an impact on their gross margins ranging from 0.1 (BMW) to 1.3 points (Renault).

Among other challenges, Bank of America also points to the probable implementation of customs tariffs by the Trump administration, which could reach 10% to 20% on imports of European vehicles, but also an offensive from Tesla and Chinese manufacturers, who would further increase their market share gains compared to traditional groups.

In this complicated context, the American bank has established its five biggest “convictions”, with four stocks that it advises to buy and one that it recommends to sell.

Continental and Pirelli on the tire side

As for its preferred actions, the establishment cites the German equipment manufacturer Continental, excited by its plan to split into two separate companies. The group will list its “automotive” activities (safety systems, brakes, chassis, driver assistance systems) separately and will thus refocus on tires. This operation must be completed by the end of 2025.

Bank of America believes that this split “could lead to the elimination of the current conglomerate discount (from which the stock suffers, Editor’s note), which could transform Continental into a company purely specialized in tires with an operating margin of 12%, 13%, similar to that of Michelin”, appreciates Bank of America.

On the tire side again, Pirelli also has the favor of the bank. The Italian group outperformed its competitors both in terms of volumes and prices in 2024, and the establishment expects this trend to continue in 2025. It expects a 7% increase in its operating profit after a increase of around 5% in 2024.

The bank also believes that the company should move closer to its dividend distribution rate target of 50%, which would allow its coupon to grow by more than 20% in 2025. It also believes that the exit of its largest shareholder, the Chinese conglomerate Sinochem (36% of the capital) could constitute a catalyst by increasing the company’s free float. The Italian government adopted a decree in June 2023 to limit the Chinese group’s control over Pirelli and an investigation was opened in October into a potential violation of this decree. “Which suggests that an exit (of capital, Editor’s note) could happen in 2025,” judges Bank of America.

Bank of America also favors the French equipment manufacturer Valeo, which it recently purchased. The establishment estimates that operating profit could increase by more than 25% in 2025, driven by savings linked to the restructuring of the company, a reduction in R&D expenses, and lower prices on semiconductors.

Stellantis can rise from the ashes

Among manufacturers, Bank of America has chosen to highlight…Stellantis. The group is experiencing a terrible year in 2024 which resulted in difficulties with its American stocks, the plunge in its volumes, a profit warning, the departure of the general director, Carlos Tavares at the beginning of December, and a fall in the share price of 41, 5%.

“However, we believe that excess inventory levels (in the United States, editor’s note) are disappearing and that 2025 should benefit from the launch of around 20 new models. We also consider that Stellantis is the company best placed to make facing the uncertainties linked to CO2 emissions regulations and the transition to electric vehicles, thanks to its strategy of adopting multi-energy platforms for its next generation of models”, develops Bank of America.

In addition, Stellantis will benefit from its exposure to North America (around 50% of revenues), a region in which the bank is more optimistic about market growth than for Europe. The establishment is also confident in the ability of the chairman of the board, John Elkann, to appoint a successor to Carlos Tavares “who will reassure investors on the path forward”.

Final conviction: sell Mercedes-Benz shares. More precisely, the establishment is “underperforming” on the stock. The establishment fears that the German manufacturer will face “a year of transition”, with increased competition from Audi, a lack of new models and potential difficulties in meeting its CO2 emissions target.

Note that on the UBS side, the Swiss bank is buying BMW, the equipment manufacturers Autoliv and Continental as well as… Stellantis. The establishment judges that the Franco-Italian-American group can offer “the best recovery story in 2025”, thanks to its good product dynamics and the correction of errors made in 2023 and early 2024.