Borsa Italiana-listed Brembo NV designs, manufactures and markets disc braking systems and components. The company offers brake discs, wheel-side modules and brakes for four of its operating segments by application: passenger cars, motorbikes, commercial vehicles and racing. Brembo derives almost three-quarters of its revenue from passenger cars and supplies its products globally.
The thesis for investing in Brembo is that it is a fundamentally solid company with a great moat and attractive financials at current prices.
Brembo is one of those value-investing opportunities you might come across, though not often enough to be considered cheap. The company has been in the industry for a very long time and is a well-known brand within its niche. Its financial performance over the past 10 years has been steady in terms of revenue, net income and operating cash flow. However, Brembo’s share price has fallen almost 20% over a one-year period. This presents investors with an opportunity to buy the company at a cheap price.
Brakes in the automotive industry could become obsolete when transitioning to electric vehicles (EV) compared to traditional internal combustion engine (ICE) vehicles. To address this, Brembo has developed a solution dedicated to electric cars, the Beyond EV Kit.
Brembo is truly at the forefront of its niche. It is the first braking system manufacturer to produce a specific brake pad dedicated to electric cars and offer a complete solution that also includes the disc with a new anti-corrosion treatment on the braking surface. The disc is durable despite being subjected to the normal wear of the brake pads from the Brembo EV Kit. To investors, this is great news, as Brembo’s innovation allows it to stay ahead of the pack in its industry.
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Brembo’s medium to long-term strategy is to invest and acquire businesses through M&A to strengthen its market leadership. Earlier this year, in January, Brembo completed the acquisition of Öhlins Racing, which is the leading manufacturer of premium, high-performance suspension technology for motorcycles and cars in the original equipment, motorsport and after market segments for an enterprise value of US$405 million ($549 million), entirely on a cash basis.
This acquisition, the largest in Brembo’s history, helps the company expand its offerings in the automotive market by enhancing its role as an integrated solutions provider. Further, Brembo plans to increase its global footprint through capacity increase initiatives and expansion projects in Poland, Mexico, China and Thailand, which are in line with its medium- to long-term plan.
In Issue 1155 (F1 stocks: Who’s on pole?), we featured Brembo as one of the under valued companies within the Formula One (F1) value chain. Brembo has a commanding position in the F1 industry when it comes to brakes, as they have been the sole sup plier of brake components to F1 teams for the past four years and are likely to contin ue for this year’s F1 season. The company supplies core brake callipers to all 10 teams on the F1 grid, reflecting its strong presence in the racing segment of its niche. If Brembo were solely supplying brakes for the F1 Championship, perhaps its share price would be much, much more than it is right now — but it is still an attractive buy at current prices due to its dominant position in the global brakes industry.
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For Brembo’s 3QFY2024 results, revenue and ebitda grew 0.3% and 0.2%, respectively, despite a challenging global macroeconomic climate resulting primarily in weaker demand, particularly in Europe. The guidance for the full FY2024 is mostly in line with the previous year. What this means is that the company is not expected to be growing positively or negatively — and our thesis is that it is just cheap at current valuations. Margins-wise, the company’s ebitda and operating margin are at a healthy 16.1% and 8.6%, respectively, with good profitability reflected by its return on equity and return on assets of 12.9% and 6.4,% respectively. Brembo’s balance sheet is also fairly good, with a current ratio of more than one times, net debt to equity of 23% and an interest cover of almost 10 times.
When it comes to relative valuations, Brembo trades at very attractive valuations compared to both regional peers and global peers. Compared to regional peers, Brembo trades at a 22%, 8% and 9% discount for its forward P/E, EV/Ebitda and P/B ratios, respectively, and a steep 43%, 51% and 61% discount to global peers for the same metrics.
Sentiment-wise, there are five “buy” calls, five “hold” calls and one “sell” call for Brembo from analysts with an average target price of almost 30% above its current trading price of EUR8.83 ($12.46). Based on our in-house valuations (see Charts 1a and b), we think the fair value for the company is EUR10.78.
Disclaimer: This article is for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This article does not take into account an investor’s particular financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor's own discretion and/or after consulting licensed investment professionals, at their own risk.
