Mexican Supplier to Ford BMW Looks to Europe as Upgrade Beckons

Mexican Supplier to Ford, BMW Looks to Europe as Upgrade Beckons

The company’s aluminum engine components are gaining business on the continent as automakers increase their reliance on the lightweight metal in an effort to cut vehicle weight and increase fuel efficiency.

Nemak SAB, Mexico’s largest publicly traded auto-parts maker, has been supplying U.S. automakers for years. Now it’s looking for more growth in Europe.

The company’s aluminum engine components are gaining business on the continent as automakers increase their reliance on the lightweight metal in an effort to cut vehicle weight and increase fuel efficiency. That helped the Alfa SAB unit boost revenue in Europe 15% in the second quarter, partially offsetting declines in North America and the rest of the world.

Nemak is bolstering the Europe business by investing in production from Russia to Germany, and shifting some work away from its North American roots. Diversifying the revenue base is a key mission if it wants to win an investment-grade credit rating, Standard & Poor’s said last month. An upgrade, in turn, may open the door to a bond sale of as much as $550 million next year, Alfa said last week.

“We continue to see unique growth opportunities in Europe in the coming years,” Nemak CEO Armando Tamez said on a conference call July 19. “This quarter’s results are a clear sign that we’re effectively seizing this opportunity to drive growth. One of our main focuses has been to develop technological innovations that enable us to capitalize on the accelerating lightweighting trend.”

Gauging Brexit

Investors aren’t sold on the argument. Nemak’s shares have dropped 9% this year while Mexico’s benchmark IPC index of has advanced 9.7%. The company’s shares fell a record 5.4% on June 24, the day after the U.K. voted to leave the European Union. That was the most since last year’s initial public offering by Nemak, which is partially owned by Ford Motor Co.

Nemak doesn’t expect a major change from Brexit, although it’s too early to tell, Tamez said. The U.K. accounts for less than 5% of sales, he said.

After this year’s stock decline through July 25, the average 12-month target price of 10 analysts surveyed by Bloomberg implied a potential 31% return for Nemak. That was the most among major Mexican stocks after OHL Mexico SAB. Nemak advanced 0.7% to 21.40 pesos at 11:12 a.m. in Mexico City on July 26.

Nemak, which makes cylinder heads and engine blocks, sees opportunities to win new business in North America despite the company’s sales drop in the second quarter, Tamez said. In Europe, where the company’s plants spread from Spain to Germany to Russia, Nemak’s revenue has been rising more quickly than total auto sales. Customers include Ford, BMW AG, Volkswagen AG and Daimler AG.

“Automakers have to use lighter parts,” Gerardo Cevallos, an analyst at Vector Casa de Bolsa, said by telephone. “That favors Nemak.”

By Andrea Navarro

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