Decarbonization Efforts And Technological Leadership Will Strengthen Market Position

Key Takeaways

• Pirelli's focus on the High Value segment and sustainability initiatives aligns with market trends, enhancing brand value and driving revenue and margin growth.
  
• Expansion into the U.S. market and technological innovations aim to boost competitive edge and profitability, countering inflationary pressures with efficiency improvements.
  
• Pirelli's financial and market vulnerabilities include exposure to trade barriers, ForEx volatility, high leverage, and geopolitical uncertainties affecting revenue and profitability.

Catalysts

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

• Pirelli's strategic focus on the High Value segment, with plans to increase its share of revenues to 78% in 2025, positions the company to capitalize on growth in higher-margin segments, supporting revenue growth and improving net margins.
  
• The company's commitment to decarbonization and sustainability initiatives, such as reducing CO2 emissions and increasing the percentage of bio-based and recycled materials, aligns with global trends and consumer preferences, potentially enhancing its brand value and driving revenue growth.
  
• Pirelli's plan to accelerate its efficiency program, targeting approximately €150 million in cost efficiencies through automation and digitization, is expected to offset inflationary pressures and support adjusted EBIT margin improvement, contributing to earnings growth.
  
• Expansion opportunities in the U.S. market, including potential increases in local production capacity and market share gains, present a significant growth catalyst for Pirelli, especially in the high-value segment, which can positively impact revenue and profitability.
  
• Technological leadership in areas like the Cyber Tyre and connected vehicle solutions, as well as a robust innovation pipeline with new product launches for electric vehicles and high rim sizes, are expected to drive competitive advantages and support both revenue growth and margin expansion.

Pirelli & C Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pirelli & C's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.4% today to 9.3% in 3 years time.
• Analysts expect earnings to reach €689.3 million (and earnings per share of €0.68) by about April 2028, up from €501.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €811 million in earnings, and the most bearish expecting €592 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.3x on those 2028 earnings, up from 10.9x today. This future PE is greater than the current PE for the GB Auto Components industry at 10.8x.
• Analysts expect the number of shares outstanding to grow 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 11.07%, as per the Simply Wall St company report.

Pirelli & C Future Earnings Per Share Growth

Risks

• Pirelli's reliance on export markets, particularly the U.S., exposes them to the risk of tariffs and trade barriers, which could affect cost structures and ultimately squeeze net margins.
  
• The volatility of ForEx (foreign exchange rates), particularly related to emerging markets, can negatively impact Pirelli’s revenue as seen with a previous negative 2.5% ForEx impact in 2024.
  
• The current high leverage with a net financial position of approximately €1.9 billion may limit financial flexibility for future growth initiatives or M&A activities, potentially impacting long-term earnings growth.
  
• Pirelli's lower market share in key high-value markets such as the U.S. could limit revenue growth compared to peers if corrective strategic measures do not yield the intended market share improvements.
  
• The geopolitical and economic uncertainties, particularly pertaining to European and North American markets, could lead to weakened demand for Original Equipment (OE) tires, potentially impacting revenue and associated profitability for Pirelli's core products.

Valuation

• The analysts have a consensus price target of €6.686 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 €7.2, 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 2028, revenues will be €7.4 billion, earnings will come to €689.3 million, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 11.1%.
• Given the current share price of €5.46, the analyst price target of €6.69 is 18.4% 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.