On Wednesday, JPMorgan downgraded Nokian Renkaat Oyj (HE:TYRES:FH) (OTC: NKRKY) stock, a Finnish tyre manufacturer, from Neutral to Underweight and lowered its price target to €6.00 from €6.60. The downgrade comes as the company prepares to start its first commercial tyre production in Romania in 2025, following a two-year restructuring period.
Nokian is also expected to reach full production capacity at its passenger car (PC) factories in Finland and the United States. During the restructuring phase, the company has increased its leverage to 2.2 times adjusted EBITDA and 3 times reported EBITDA. Despite these developments, the dividend payment of €0.55 per share has been supporting the share price.
The firm's future earnings growth is anticipated to be fueled by new product introductions and improved PC margins. However, the analyst noted that this growth phase could be uncertain and challenging. Nokian has set a medium-term goal of achieving €2 billion in group sales, which depends on selling approximately 18 million PC tyres, a significant increase from the 14 million tyres sold in 2022 (excluding Russia).
The company's growth will also depend on the success of its all-season product offerings in Europe and North America. The analyst pointed out that Nokian's targets have often been delayed in the past, and the current growth expectations may be overly ambitious. Additionally, the European tyre industry is facing potential headwinds, including limited potential for market-linked volume growth, margin pressures, increasing Asian imports, and foreign exchange challenges due to a stronger US dollar.
InvestingPro Insights
Recent data from InvestingPro sheds additional light on Nokian Renkaat Oyj's financial situation, aligning with JPMorgan's cautious stance. The company's market capitalization stands at $1.07 billion, with a concerning P/E ratio of -371.5, indicating current unprofitability. This is further supported by an InvestingPro Tip highlighting that Nokian has not been profitable over the last twelve months.
Despite these challenges, InvestingPro Tips suggest that net income is expected to grow this year, and analysts predict the company will return to profitability. This potential turnaround could be crucial as Nokian navigates its restructuring phase and aims for ambitious sales targets.
The company's dividend yield of 2.54% and its 29-year streak of maintaining dividend payments are noteworthy, especially given JPMorgan's mention of dividend support for the share price. However, an InvestingPro Tip cautions that Nokian is quickly burning through cash, which may impact future dividend sustainability and growth plans.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for Nokian Renkaat Oyj, providing a deeper understanding of the company's financial health and market position.
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