Bullish indicating open at $55-$60, IPO prices at $37
Investing.com -- Citi has added Pirelli (BIT:PIRC) to its European Focus List, maintaining a Buy rating on the stock and a €7 target price, citing a compelling risk-reward profile despite tariff-related uncertainties.
The bank argues that recent share price weakness, with the stock 15% below recent highs, presents an attractive entry point for long-term investors.
In Citi’s view, Pirelli remains well positioned to deliver first-quarter results that should support the investment case, with organic revenue growth forecast at 3.6% and an expected EBIT margin of 15.6%, around 3% ahead of consensus.
“1Q25 shouldn’t upset the apple cart,” analysts led by Ross MacDonald said, with mix and pricing helping to offset weaker original equipment demand.
A key near-term risk is the impact of U.S. tariffs on imported tires, especially those from Brazil and Europe.
While Pirelli’s Mexican production is USMCA-compliant and thus temporarily exempt from additional duties, tariffs on around 40% of U.S. imports could result in an EBIT revision of around 5% in the worst case.
Even so, Citi believes these headwinds are manageable and largely priced in, estimating that full-year EBIT margin guidance could fall modestly from 16% to around 15.5% under the harshest assumptions.
An update on the company’s shareholder structure is also expected soon, with a board meeting scheduled for April 28.
Citi sees potential upside if Pirelli moves to reduce the influence of its largest shareholder, China’s Sinochem, which currently holds a 37% stake and has limited expansion options in the U.S. market.
“If we see an outcome that reduces the influence of the Chinese shareholders and allows for further U.S. capacity additions, or in which the free float of the business is improved from the current <40% level, we think underlying investor appetite to own Pirelli is high and shares could react positively,” analysts said.
On valuation, Citi notes that only two other companies in the Stoxx 600 share Pirelli’s combination of strong balance sheet and margin profile while trading below a 10x price-to-earnings (P/E) multiple.
With Pirelli valued at just over 8x forward earnings, the bank sees the stock as undervalued, arguing that the market is overlooking its pricing power and consistent profitability.
“We think the blend of value and quality at Pirelli makes the stock appealing in a sector context and see the recent pull back to €5.20 as an opportunity for patient investors with Pirelli risk-reward now very positively skewed,” the analysts wrote.
They believe near-term uncertainties around tariffs and shareholder structure should become clearer soon and argue that Pirelli’s low valuation, both historically and relative to peers, is unjustified given its strong and stable margins.