Bosch Cyber Tyre Partnership And Chinese EV Market Expansion Fuel Earnings Growth

Key Takeaways

• Growth in high-value tire segments and partnerships in key markets strengthen Pirelli's position and improve margins despite regional demand shifts.
  
• Innovations and efficiency gains drive differentiation, sustainability, and earnings stability, securing competitive advantage in the evolving automotive landscape.
  
• Economic and market pressures, combined with high debt and dependency on select segments, may threaten Pirelli's future revenues and profitability.

Catalysts

Manufactures and supplies tires for cars, motorcycles, and bicycles worldwide.

• Pirelli's increased focus and growth in high-value tire segments, particularly in the 18 inches and above category, is expected to drive revenue growth given its high demand and potential for premium pricing. This strategic focus is aiming for mid-single-digit growth, improving the sales mix and enhancing profitability.
  
• The partnership with Bosch to develop Cyber Tyre technology, integrating sensors into car control systems, is an innovative venture that could improve product differentiation and lead to future revenue growth by tapping into connectivity and AI trends in automotive industries.
  
• Pirelli's continued expansion in the Chinese market, especially its partnerships with local premium electric vehicle (EV) manufacturers, positions it well to offset declines in demand from European carmakers and capture market share, thus boosting volume growth and potentially improving net margins due to a focus on high-margin products.
  
• Efficiency improvements and reduced production costs, achieving around 80% of planned efficiencies, enable Pirelli to counteract inflationary pressures. These savings not only protect current margins but also set a foundation for improved earnings stability and enhanced future profitability.
  
• The decarbonization targets validated by the Science-Based Targets initiative enhance Pirelli's sustainability profile, potentially reducing operational costs associated with environmental impacts and creating long-term value through enhanced brand equity and customer trust, which could improve net margins and long-term earnings.

Pirelli & C Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pirelli & C's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 9.3% in 3 years time.
• Analysts expect earnings to reach €668.7 million (and earnings per share of €0.64) by about December 2027, up from €432.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €564 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.1x on those 2027 earnings, up from 12.6x today. This future PE is lower than the current PE for the GB Auto Components industry at 18.0x.
• Analysts expect the number of shares outstanding to grow by 1.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.86%, as per the Simply Wall St company report.

Pirelli & C Future Earnings Per Share Growth

Risks

• Geopolitical tensions and trade tensions between North America, China, and Europe may impact economic growth and the car industry, which could negatively affect Pirelli's revenues and earnings.
  
• Slowing demand from carmakers and volatility in raw material prices could impact Pirelli's revenue growth and profitability.
  
• High levels of debt, despite recent reductions, continue to weigh on Pirelli's financials and could impact future net margins and earnings.
  
• The negative impact of foreign exchange volatility, particularly in emerging markets, has already affected revenues, which could continue to pressure future financial results.
  
• The dependence on a select few high-value market segments, like electric vehicles, may pose risks if these markets do not grow as expected, potentially impacting Pirelli's future revenues and net margins.

Valuation

• The analysts have a consensus price target of €6.42 for Pirelli & C 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 €7.3, and the most bearish reporting a price target of just €4.6.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €7.2 billion, earnings will come to €668.7 million, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 11.9%.
• Given the current share price of €5.46, the analyst's price target of €6.42 is 15.0% 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.