EV Shift And Supply Chain Woes Will Threaten Rail Demand

Key Takeaways

• Shifting transport trends, increased competition, and supply chain disruptions are raising costs and threatening Knorr-Bremse's long-term revenue growth and profitability.
  
• Heavy reliance on key customers and regulatory-driven R&D spending expose the company to heightened earnings volatility and risk of weakened market positioning.
  
• Expansion into high-value aftermarket services, focus on innovation, and favorable market trends are strengthening profitability, providing growth visibility, and supporting long-term earnings stability.

Catalysts

Develops, produces, and markets brake systems for rail and commercial vehicles and other safety-critical systems worldwide.

• Demand for traditional rail and commercial vehicle braking systems may be weakened over the long term as transport habits shift towards electric vehicles and micromobility, limiting Knorr-Bremse's addressable market and putting long-term revenue growth at risk.
  
• The company faces persistent pressure from global trade tensions and deglobalization, resulting in increasingly fragmented and costly supply chains. This complexity could raise Knorr-Bremse's operating cost base and ultimately reduce future net margins.
  
• Elevated customer concentration risk in rail and truck segments leaves Knorr-Bremse vulnerable to abrupt revenue declines and higher earnings volatility if any major customer reduces orders or shifts sourcing to competitors.
  
• Margin pressure is likely to intensify as new entrants and low-cost competitors from Asia increase pricing competition, especially as rapid adoption of automation and digitization by OEMs could commoditize core braking solutions and erode Knorr-Bremse's premium positioning, threatening both revenue growth and operating margins.
  
• Stricter sustainability and emissions regulations, combined with the ongoing transition towards electric and alternative powertrains, may necessitate an unsustainably high level of R&D investment for regulatory compliance without guaranteed innovation leadership, putting longer-term profitability and ROI at risk.

Knorr-Bremse Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Knorr-Bremse compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Knorr-Bremse's revenue will grow by 3.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.3% today to 10.1% in 3 years time.
• The bearish analysts expect earnings to reach €891.1 million (and earnings per share of €5.54) by about August 2028, up from €422.0 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 16.3x on those 2028 earnings, down from 34.6x today. This future PE is lower than the current PE for the DE Machinery industry at 20.3x.
• Analysts expect the number of shares outstanding to grow by 4.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.14%, as per the Simply Wall St company report.

Knorr-Bremse Future Earnings Per Share Growth

Risks

• Strong, resilient aftermarket business now constitutes 47% of total revenues, providing recurring, higher-margin income streams and helping to offset cyclical downturns, thereby supporting profit margins and earnings stability.
  
• A record high order backlog in Rail (RVS) with over €5.5 billion and sustained book-to-bill ratios above 1 for 15 consecutive quarters provide significant revenue visibility and support multi-year sales and earnings growth.
  
• Expansion into high-growth regions such as APAC, especially China and India, combined with continued investments in R&D, digitalization, and the establishment of an artificial intelligence hub, are likely to reinforce Knorr-Bremse's technology leadership and pricing power, buttressing future revenues and margins.
  
• Accretive M&A, such as the KB Signaling acquisition, has delivered stronger-than-expected increases in profitability and EBIT margin, showing that strategic portfolio expansion can directly enhance group earnings and margin trajectory.
  
• Ongoing European rail and infrastructure stimulus programs, as well as anticipated defense initiatives, position Knorr-Bremse to benefit from sustained public investment cycles, which could drive both top-line growth and operating profit expansion in the medium to long term.

Valuation

• The assumed bearish price target for Knorr-Bremse is €66.82, which represents two standard deviations below the consensus price target of €88.93. This valuation is based on what can be assumed as the expectations of Knorr-Bremse'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 €104.0, and the most bearish reporting a price target of just €65.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €8.9 billion, earnings will come to €891.1 million, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 6.1%.
• Given the current share price of €90.5, the bearish analyst price target of €66.82 is 35.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.