Global Infrastructure Investments And Decarbonization Will Fuel Enduring Industrial Momentum

Key Takeaways

• Expanding production flexibility, regionalization, and technological leadership position Tupy to capture greater market share and benefit from long-term industry shifts towards decarbonization and clean technologies.
  
• Cost optimization, restructuring, and growth in resilient, high-margin segments enhance margin potential and earnings stability despite cyclical industry fluctuations.
  
• Continued reliance on legacy automotive segments and slow diversification, amid EV disruption and regulatory pressures, threaten Tupy's long-term growth, profitability, and financial stability.

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.

• While analyst consensus sees new high-value contracts and investment in decarbonization as future revenue drivers, the scale of Tupy's global production footprint and unique cross-continental flexibility means it can capture significantly more market share from global OEMs as new regionalization and nearshoring trends accelerate, resulting in step-changes in both revenues and net margins.
  
• Analysts broadly agree that plant optimization and cost reduction will boost margins, but the current restructuring-driving occupancy from 65 to 80 percent and set to reduce structural costs by up to 180 million reais per year-positions the company for an even larger margin expansion when demand recovers, potentially restoring or exceeding historical peak EBITDA margins and delivering a powerful boost to earnings.
  
• As global infrastructure investment ramps up, especially in emerging markets, Tupy's dominant position in structural castings and growing presence in high-growth segments like power generation and agricultural machinery positions it to benefit disproportionately from this long-term demand surge, supporting above-industry-average revenue growth well into the next decade.
  
• The transformation and expansion of the high-margin replacement parts and generator set business, backed by the MWM installed base and unmatched distribution reach across Brazil and export markets, is providing a reliable, countercyclical revenue stream-with proven double digit growth-that will anchor cash flow and materially improve overall earnings quality and resilience.
  
• The company's leadership in advanced material and biofuel engine technology, coupled with public policy momentum for cleaner fleets, means Tupy is poised to become a critical supplier as cities and fleets transition to next-generation, environmentally-compliant vehicles, unlocking new multi-year contract opportunities and supporting significant long-term margin and revenue expansion.

Tupy Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Tupy compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Tupy's revenue will grow by 7.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -0.4% today to 6.3% in 3 years time.
• The bullish analysts expect earnings to reach R$811.1 million (and earnings per share of R$5.87) by about August 2028, up from R$-37.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 7.6x on those 2028 earnings, up from -43.9x today. This future PE is lower than the current PE for the BR Machinery industry at 8.1x.
• Analysts expect the number of shares outstanding to decline 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 27.29%, as per the Simply Wall St company report.

Tupy Future Earnings Per Share Growth

Risks

• Tupy remains highly exposed to the heavy-duty automotive and agricultural sectors, which are facing persistent cyclical downturns and structural declines in demand, as evidenced by recent double-digit drops in production and sales volumes, risking further long-term revenue declines if end markets do not recover as anticipated.
  
• Accelerating global shift toward electric vehicles and ongoing technological changes in powertrains pose a major threat to Tupy's core business of iron cast engine components, potentially resulting in sustained volume and margin compression as ICE demand structurally erodes.
  
• Despite management efforts to diversify into replacement, energy, and decarbonization segments, the pace of portfolio diversification is slow, with these new divisions contributing only a limited portion of total revenues, thereby creating continued dependence on legacy segments with inferior long-term growth and EBITDA prospects.
  
• Rising global protectionism, new tariffs, and environmental regulation-including the strong impact of a recent 50% US tariff on Brazil-sourced products-force Tupy into complex, higher-cost supply chain reorganizations and capex outlays, while offering only partial mitigation, which could pressure operating margins and diminish net income over time.
  
• The company's heavy use of foreign currency debt and substantial reliance on exports make its earnings and cash flows vulnerable to adverse exchange rate movements, especially given current leverage ratios above two times EBITDA, increasing the risk to both net profit stability and the company's ability to reinvest for future growth.

Valuation

• The assumed bullish price target for Tupy is R$31.49, which represents two standard deviations above the consensus price target of R$21.89. This valuation is based on what can be assumed as the expectations of Tupy's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• 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$18.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be R$12.9 billion, earnings will come to R$811.1 million, and it would be trading on a PE ratio of 7.6x, assuming you use a discount rate of 27.3%.
• Given the current share price of R$13.74, the bullish analyst price target of R$31.49 is 56.4% 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.