US Tariffs And Weak Demand Will Depress Margins Before Recovery

Key Takeaways

• Continued economic weakness and trade protectionism threaten margins, volumes, and create operational challenges, despite Tupy's flexible, diversified manufacturing footprint.
  
• Reliance on internal combustion markets and delayed ramp-up of new projects pose risks to revenue growth and cash flow amid accelerating industry transition.
  
• Reliance on declining engine component markets, rising export costs, and slow diversification threaten profitability, market share, and financial flexibility despite growth in new business units.

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.

• Although Tupy is positioned to benefit over the long term from rising infrastructure and energy needs that drive demand for commercial vehicles, agriculture, and power generation equipment-trends that support volumes-persistent economic slowdowns in core end markets like the United States and Europe are currently resulting in depressed sales volumes and margin compression, which may continue to negatively impact revenue and earnings if recovery is delayed beyond 2026.
  
• While Tupy's flexible, multinational manufacturing footprint allows it to reposition production and mitigate risks from regional tariffs and supply chain disruptions-potentially increasing its relevance for OEMs seeking diversified sourcing-the ongoing escalation of trade protectionism (such as 50% US tariffs on Brazilian exports) creates operational complexity and lingering risks of client attrition or margin erosion as cost pass-through becomes challenging and strategic investments are diverted to compliance rather than growth.
  
• Despite promising investments in higher value-added products, new engineering services, and further automation to enhance profitability and reduce fixed costs-capable of improving gross margin by up to 2 percentage points by the end of 2026-these efficiency gains rest on the assumption that volume will recover in the medium term; if demand remains at historic lows and fixed cost absorption lags, the failure to realize improved margins could depress net earnings more than anticipated.
  
• While Tupy's expansion into decarbonization solutions, generator sets, and the spare parts segment aims to diversify revenue and tap into secular shifts toward energy transition, the company's heavy reliance on traditional internal combustion engine platforms-particularly given tightening global emissions regulations-risks shrinking the addressable market and undermining long-term revenue growth if electrification trends accelerate faster than Tupy can innovate or reposition its product mix.
  
• Although signing long-term contracts tied to new, higher value projects should bolster revenue predictability and client stickiness over time, most of these new agreements are scheduled to ramp up production only from 2026 onward; in the interim, persistent idle capacity, client project postponements, and potential contract renegotiations due to global trade dynamics leave Tupy's cash flows and EBITDA exposed to downside risk through 2025.

Tupy Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Tupy compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Tupy's revenue will grow by 3.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.4% today to 5.1% in 3 years time.
• The bearish analysts expect earnings to reach R$575.1 million (and earnings per share of R$4.99) by about August 2028, up from R$-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 bearish analyst cohort, the company would need to trade at a PE ratio of 6.4x on those 2028 earnings, up from -52.5x 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

• The accelerated shift towards electrification and stricter environmental standards is reducing long-term demand for cast iron engine components, which remain Tupy's core offering, risking significant revenue declines and pressure on addressable market size.
  
• High tariffs on exports to the United States, especially the recent 50% rate on Brazilian products, increase Tupy's cost structure and may prompt key OEM clients to consider alternate suppliers or in-house production, eroding volumes, profitability and market share.
  
• Continued commercial vehicle and off-road machinery demand weakness in major export markets, coupled with clients revising volume projections downward, exposes Tupy to prolonged underutilization of its manufacturing base, reducing scale benefits and suppressing both revenue and net margins.
  
• Tupy's elevated net debt ratio of over 2.4 times adjusted EBITDA, combined with persistent sales declines and margin pressure, heightens refinancing and liquidity risk in a high interest rate, volatile commodity environment, potentially undermining future earnings and financial flexibility.
  
• While new business units in replacement, energy, and decarbonization are growing, their ability to fully offset declines in the structural components core remains unproven, and slow diversification away from ICE-centric revenue streams could dampen the company's long-term revenue growth and earnings potential.

Valuation

• The assumed bearish price target for Tupy is R$18.0, which represents the lowest price target estimate amongst analysts. 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be R$11.3 billion, earnings will come to R$575.1 million, and it would be trading on a PE ratio of 6.4x, assuming you use a discount rate of 27.3%.
  
• Given the current share price of R$15.88, the bearish analyst price target of R$18.0 is 11.8% 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.