Biofuel Engines And Auto Contracts Will Open New Horizons

Key Takeaways

• Tupy's investments in technology and strategic acquisitions aim to enhance long-term value and diversify revenue streams, focusing on innovation and new market opportunities.
  
• Operational optimizations and new contracts with automakers are expected to elevate margins and earnings, boosting Tupy's financial performance and market presence.
  
• Over-reliance on efficiencies and exposure to macroeconomic uncertainties could jeopardize revenue stability and pressure net margins due to high restructuring and development costs.

Catalysts

Engages in the development, manufacture, and sale of cast and compacted graphite iron structural components in North America, South and Central Americas, Europe, Asia, Africa, Oceania, and internationally.

• Tupy is investing in new technologies and innovative projects such as bioplants, biofuel-powered engines, and decarbonization efforts, which are expected to become future revenue streams. This diversification and investment in high-tech segments aim to create long-term value and potentially increase future revenue.
  
• The company is optimizing its operations through cost reduction initiatives, reallocation of production to more efficient units, and capturing synergies from acquisitions. These efforts are expected to improve operational margins and contribute to higher earnings over time.
  
• Tupy has secured new contracts with automakers in Europe and the Americas aimed at a new generation of engines, offering a robust pipeline that could significantly enhance revenue as these contracts mature in the coming years.
  
• The acquisition of MWM has not only provided operational efficiency and higher margins but also opened new business avenues in engineering services with a focus on assembly and component outsourcing, which can enhance net margins due to the high return on invested capital.
  
• The expansion into new business areas with existing infrastructure, particularly with generator sets and maritime engines, and increasing the spare parts market share is expected to lead to higher cash generation and improved net margins.

Tupy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tupy's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.7% today to 5.0% in 3 years time.
• Analysts expect earnings to reach R$621.8 million (and earnings per share of R$4.33) by about April 2028, up from R$79.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.2x on those 2028 earnings, down from 40.7x today. This future PE is greater than the current PE for the BR Machinery industry at 7.3x.
• Analysts expect the number of shares outstanding to decline by 5.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 23.24%, as per the Simply Wall St company report.

Tupy Future Earnings Per Share Growth

Risks

• The sharp drop in physical sales volumes despite achieving the highest EBITDA suggests an over-reliance on efficiency gains and could indicate future revenue volatility if sales volumes don't recover.
  
• A 12% drop in overall revenue shows potential vulnerability to market conditions, raising concerns about sustained revenue growth and overall net margins.
  
• High restructuring costs (R$58 million) and ongoing development expenses in new business areas (R$70 million) may continue to place pressure on earnings and net margins if these investments do not yield expected returns promptly.
  
• Exposure to macroeconomic uncertainties, specifically in foreign markets experiencing declining revenues, introduces risks to revenue predictability and could affect overall earnings stability.
  
• Increased financial expenses due to new borrowings and potential negative impacts from exchange rate variation (e.g., depreciation of the real) pose risks to financial stability and could erode net margins if interest rates rise further.

Valuation

• The analysts have a consensus price target of R$26.222 for Tupy 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$35.0, and the most bearish reporting a price target of just R$21.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$12.4 billion, earnings will come to R$621.8 million, and it would be trading on a PE ratio of 9.2x, assuming you use a discount rate of 23.2%.
• Given the current share price of R$23.71, the analyst price target of R$26.22 is 9.6% 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.