Pirelli Spins Its Wheels After a Premium IPO
It’s been off to the races for Italian initial public offerings this past year. The Borsa Italiana has seen some 30 IPOs, the highest since 2007, with the surge attributed to factors such as a law that nudges savers to invest in Italian companies, as well as the Milan exchange’s efforts to encourage new listings.
Not all of those newcomers look destined for the winner’s circle. Pirelli (ticker: PIRC.Italy)—the tire manufacturer whose shares were relisted in October—has been drawing caution flags ever since.
A big challenge for the Milan-based tire maker, which supplies Formula 1 racing, is its already pricey valuation. The premium for Pirelli, which derives most of its revenue from higher-end tires, is justified, say Berenberg analysts in a recent note. But investors are unlikely to pay up even more, and its profit gains probably won’t outpace the sector’s overall growth, they note. The Berenberg team, led by Alexander Haissl, has a Hold rating on the stock and a price target of 6.20 euros ($7.35), implying a drop of about 13%.
Pirelli’s shares trade at 14 times estimated forward-year earnings, and another key metric—enterprise value to earnings before interest, taxes, depreciation, and amortization —comes in around 12. Those multiples stand above corresponding figures for Pirelli rivals: Compagnie Générale des Établissements Michelin (ML.France), Continental (CON.Germany), Bridgestone (5108.Japan), and Goodyear Tire & Rubber (GT).
“Versus European peers like Michelin and Continental, Pirelli trades at a 20% premium,” fret Deutsche Bank analysts in a recent note, referring to both the price/earnings ratio and EV/Ebitda. And that’s with Pirelli carrying more debt and generating less free cash flow, says the bank’s Gaetan Toulemonde and his colleagues. They have a Hold rating and price target of €6.70 on the stock.