My work on ThyssenKrupp (OTCPK:TYEKF) didn’t garner much attention when I said to invest at a low valuation, which in turn resulted in market outperformance. This in itself is not a strange thing – ThyssenKrupp has been a difficult company to invest in, to put it lightly. Nor did I go in at anything approaching a full position in the company. ThyssenKrupp is BB-rated with a low yield and high volatility to boot.
But there are many things to like, and there is a positive thesis that can be made, beyond just the Ukraine war upside which we saw in the fiscal of 2022.
Let’s revisit the thesis here, and see what ThyssenKrupp can offer investors on a forward basis. I do not expect much attention or traction here, and I would also be the first to caution you to properly size your position – but the upside is certainly here for your consideration, and you should not underestimate it.
Because under the assumption that ThyssenKrupp will follow its historical multiples, or anything close to them, and the forecasts actually materialize at anything close to expectations, the upside for this business will be almost 200% in less than 3 years.
Let me show you.
ThyssenKrupp – There are many things to like about undervalued tradition.
If you recall my last article from around 7 months back, you’ll know that my investment in Thyssenkrupp outperformed the market by a factor of 10x at the time (Source). Unfortunately, a repeat performance until now was not in the books. And there are reasons for this.
Thyssenkrupp is really more of a conglomerate of various business units than it is a stand-alone sort of business, and this has been the case for quite some time. The company has a now 23-year tradition, and it controls over 500 global subsidiaries, in large part controlled by the traditional form found in Germany – the family foundation model. There are outside owners too though – Icahn has a pretty significant stake.
Tradition and expertise remain the core reasons for anyone’s desire to invest in ThyssenKrupp. The company represents 200 years of metal history. It has survived several world wars and is older than the American Civil War. The company was a weapons manufacturer for the Prussian Empire, Bavaria, and other parts of Europe. Had it been in the US, it might in fact have provided supplies and weapons for the Civil War.
This sort of tradition should never be underestimated. It means that whatever historical environment you can think of, ThyssenKrupp has been through it and thrived. In this latest set of decades, we’ve seen the company move to more ESG-focused areas such as carbon-friendly steel, industrial materials, hydrogen, and other activities.
ThyssenKrupp reports in 6 segments – and this restructuring is still not done.
If you ask me, why I invest in ThyssenKrupp at a certain valuation, my answer to you is simple.
The company is the market leader in slewing bearings, meaning it supplies not only legacy but main components for wind energy and other industrial applications. Aside from this, ThyssenKrupp is the largest forging company in the world for steel. It supplies most automotive OEMs, construction, and mining sectors either directly or indirectly.
Yes, it’s incredibly volatile. Its earnings trends actually discourage investments, I would say, unless you’re very resilient and long-term. The 3Q23 results really confirm this, including the fact that the company is still in the midst of that transformation with its 6 segments.
Some might argue that ThyssenKrupp does not seem to know what it wants to focus on – I say the company has definite focal areas, and then also have areas that really aren’t all that interesting or “core”, such as Marine with a very low EBIT (though interesting in its own right). However, the company has targets for each of their segments – and some segments are actually flagged for, or already streamlined.
Let’s also talk about where ThyssenKrupp has done extremely well. For one, the Nucera IPO was excellent. It was one of the largest EU IPOs for 2023, and put Nucera at an initial market cap of €2.5B, generating proceeds of over half a million Euros for Thyssenkrupp. The company also retains a majority stake in the business.
Despite softening macro and trends, the company’s financials are fully in line with expectations here, and the company has confirmed its longer-term outlook. Thyssenkrupp, as before, is also continuing to receive public support for it decarbonization projects, in this case to the tune of almost €2B worth of government funding.
On a quarterly basis, we have nearly €10B in quarterly sales, even down 12% YoY this comes to a run rate of €40B, with confirmed 9M sales of nearly €29B and a 9M adjusted EBITDA of around €1.3B. This is significantly below the 2022 results and at a margin of around 4.5%. But these trends were fully expected.
Macro and transformation is what matters here. And thanks to strong 2022 trends, ThyssenKrupp’s balance sheet looks healthier than it has in a long time. The company is at net cash, with pensions and an equity ratio of nearly 40%
And what you see above is not yet fully realized in terms of effects from Nucera.
Automotive trends and other positive macro have guaranteed that ThyssenKrupp continue to see earnings and sales, even if they are below last year’s levels. The record pricing levels of last year really wreaked havoc with the YoY comparisons and muddled some of the actual demand growth that we have here.
The overall picture in terms of market outlook is positive. LVP and HVP productions are up, and renewables and hydrogen demand is looking good, both on the segment and on a global basis. The only negative expectation comes from European steel sheet consumption – and that’s only Europe, the next is up. Many of the company’s segments are seeing potential sales growth expectations of over 5%, while no segment or geography is currently seeing more than a 5% forward decline potential.
So while the company is expecting a significant sales and EBIT decrease, this is due to the record results. Segment outlooks are actually positive in many cases, or at least flat in some. Only a few are negative.
There are many things to like about ThyssenKrupp in the latest set of earnings. A confirmed full-year outlook, successful IPO, projects on track and government funding secured, and the company actually outperforming my expectations with regard of the current macro environment.
Criticism levied at the company has to do mostly with the company macro strategy – in that many say it does not seem to work. SOTP valuations put ThyssenKrupp at significant discounts, but many argue that the company has failed to “unlock value” here. Some analysts also focus on the smallest of the segments with the lowest earnings, such as Marine, as one of the arguments for investing. This is not something I would do, even if the marine segment and its leading manufacturer of subs (non-nuclear) is a very interesting segment.
My argument would be that ThyssenKrupp will manage its transformation to a more profitable steel business, with many of its core sectors either intact as part of the holding, or at a very high stake percentage, such as with Nucera.
What I would look at when it comes to this company isn’t an over-focus on the Marine systems segment, but a focus on the core segment transformation, which yes, has been ongoing for several years, but I believe we can see both progress and a positive earnings trend for the next few years.
Let me show you what I mean.
ThyssenKrupp upside – hardly safe, but there
First off, let’s dispel any notion that this is a safe or conservative investment. It’s not. No investment with this sort of EPS trend could, or should ever be called that.
This is the sort of investment you might be interested in if you like your potential returns to be 200% in less than 3 years, but at the cost of a high risk. In such cases, I try to build my thesis on as much quality as I can. This is possible here. But it’s not unrealistic that the company may go nowhere in 2-3 years despite what’s being forecasted here.
The upside I see is quite simple. If the company manages a reversal in earnings next fiscal, currently estimated at an adjusted EPS of €0.85, with another €1.16 result in 2025, and the valuation follows suit to at least 15-17x P/E, then your returns are no less than 150-190% RoR. Almost nothing of that is the company dividend.
If the company, as it has in the past, gone up to around 28x P/E, that RoR becomes almost 400% in less than 3 years.
You’re essentially investing in the safety of one of the continents and world’s oldest steel businesses, and betting on its ability to generate these earnings and that the market will recognize this with a high return. It’s a very risky play. That’s why I actually sold half of my position some months ago at a high profit.
I’ll still apply a discount to ThyssenKrupp – 20% to reflect the company’s Euro focus, which is under heavier fire and effects, but that still leaves an upside of almost 35% to any sort of conservative target, with an implied peer-based PT of €10.5/share.
My PT in my last article was around €15/share long-term. I don’t see a reason to change this PT, but due to the sheer risk of this investment, you really need to ask yourself if this is right for your portfolio as well as your investment strategy. Many of you will find that this is not the case, as it actually should be.
S&P Global targets for ThyssenKrupp are much lower than mine. We have a range starting at €6 and going to €16, with an average PT of €10/share. 4 out of 8 analysts are at a “BUY” here (Source: S&P Global). The risk in this position is really that it goes nowhere for 2 years – and then you’ll have missed out on other returns. There is no fundamental danger to the company, that’s what perhaps differentiates this business the most from some of its higher-risk peers or other risky investments.
If you’re willing to allocate a portion of your portfolio to a higher-risk play but with potentially high rewards, this is an option. I say “BUY”, but it’s a speculative one with the current thesis.
- ThyssenKrupp remains one of the more interesting global plays on steel, forging and the steel sector in Europe. While there are peers I’ve made money on that are not ThyssenKrupp, like Gerdau and Arcelor, I consider this one, despite its 50% RoR in the last year, to still have an upside. I added to it not that long ago, and I will continue to hold and build my position in the business.
- ThyssenKrupp is undervalued on the basis of NAV, Peers, and forecasts – because of that, my rating for 2023 for the company is a very clear “BUY”, albeit a clearly speculative one.
- My PT for ThyssenKrupp remains at €15/share native.
Remember, I’m all about:
- Buying undervalued – even if that undervaluation is slight and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
- If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
- If the company doesn’t go into overvaluation but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
- I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them (italicized).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside that is high enough, based on earnings growth or multiple expansion/reversion.
The only flaw with ThyssenKrupp, aside from its credit rating, is the lack of a dividend. But, I still consider it a “BUY” here.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.