Latin America's Urbanization Will Drive Aftermarket Opportunities

Key Takeaways

• Strong aftermarket focus and agility in adapting to regulatory changes position Fras-le for resilient, stable earnings and incremental revenue across diverse markets.
  
• Expansion in local manufacturing, efficient integration of acquisitions, and urban infrastructure trends are set to boost margins and drive sustainable long-term growth.
  
• Fras-le faces structural risks from reliance on traditional aftermarket products amid rising competition, macroeconomic volatility, tariffs, and slower adaptation to vehicle electrification trends.

Catalysts

Provides friction materials for braking systems and other products in Brazil, England, Argentina, the United States, China, India, Uruguay, the Netherlands, and internationally.

• Fras-le is well positioned to benefit from ongoing urbanization and rapid vehicle parc growth in emerging markets like Latin America, as evidenced by strong sales recoveries and market share gains in countries such as Argentina and Mexico-suggesting future revenue growth as urban expansion and infrastructure investment continue.
  
• The company's intense focus on expanding aftermarket exposure (now above 90%) directly leverages global vehicle fleet aging and increased demand for vehicle maintenance, supporting long-term resilience and more stable earnings even as OE sales fluctuate.
  
• Investments in local manufacturing expansion-such as the 25% capacity increase at Fremax in Joinville and development of strategic hubs in key urban centers-enhance cost efficiency, supply chain independence, and market responsiveness, which are likely to boost margins and support sustainable earnings growth.
  
• The integration of recent acquisitions (e.g., Dacomsa, Controil, Nakata, Sorocaba/Jurid do Brasil) is tracking ahead of synergy targets, with management expecting accelerated realization of cost and operational efficiencies in the next 12–18 months, providing a clear catalyst for margin improvement and higher EBITDA.
  
• Fras-le's agility in quickly developing parts for new vehicle models, including Chinese brands gaining share in key markets, and its proactive adaptation to regulatory changes and safety standards, will allow it to capture incremental revenues in both established and evolving geographies as safety and emissions standards tighten globally.

Fras-le Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fras-le's revenue will grow by 13.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.0% today to 8.8% in 3 years time.
• Analysts expect earnings to reach R$622.0 million (and earnings per share of R$2.12) by about August 2028, up from R$336.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.1x on those 2028 earnings, up from 18.1x today. This future PE is greater than the current PE for the BR Auto Components industry at 7.3x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 21.06%, as per the Simply Wall St company report.

Fras-le Future Earnings Per Share Growth

Risks

• Fras-le's heavy reliance on the aftermarket (93% of revenue) may become a structural weakness if secular trends (such as increased EV and autonomous vehicle adoption) reduce wear rates for brake pads and linings or if OEMs shift toward supplying more durable, longer-life components, negatively impacting future revenue and aftermarket volumes.
  
• Sustained margin pressure is evident from increasing competition, the need for significant sales discounts, and raw material/labor cost inflation, with management citing "more pressure for discounts" and lower gross margins, suggesting competition and cost dynamics could compress net margins over the long term.
  
• The company's exposure to volatile macroeconomic conditions in emerging markets like Brazil and Argentina, along with recent challenges (e.g., floods at Controil, high capital costs, inventory adjustments), creates earnings instability and currency risk, potentially undermining consistent earnings growth and resilience.
  
• Heightened global trade tensions and tariff regimes (e.g., new US tariffs of 27–50% on key exports) add uncertainty to Fras-le's profitability in North America, especially for heavy vehicle components, and mitigation efforts appear temporary-posing downside risk to revenue and EBITDA margins from export markets.
  
• Heavy dependence on traditional friction products and slow diversification into next-generation mobility solutions (e.g., EV or ADAS-compatible components) risks long-term revenue erosion if Fras-le's R&D pace or product innovation lags behind faster-moving global competitors adapting to electrification and changing vehicle architectures.

Valuation

• The analysts have a consensus price target of R$28.017 for Fras-le based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$34.1, and the most bearish reporting a price target of just R$23.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$7.1 billion, earnings will come to R$622.0 million, and it would be trading on a PE ratio of 27.1x, assuming you use a discount rate of 21.1%.
  
• Given the current share price of R$21.99, the analyst price target of R$28.02 is 21.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.