Autos

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Need some fresh tires for your Lamborghini? Perhaps you’d like them to have Barbie-Doll pink stripes around the rims? No problem, Pirelli & C. SpA, whose slicks adorn Formula One race cars, will sell you a set for $6,780, installation not included.  

Pirelli

Two years after it was taken private in a transaction involving ChemChina and chief executive Marco Tronchetti Provera, Pirelli is preparing to return to the stock market next month. If they're sensible, the owners won't price the IPO quite as aggressively as those customized tires.

Making tires is surprisingly lucrative; it certainly beats building cars. And unlike some auto parts, tires aren't about to made redundant by the arrival of electric or autonomous vehicles. Fortunately for the industry, flying cars probably won't be common anytime soon.

Pirelli has a strong brand and racing pedigree, plus a plausible growth story. It’s focused on the premium end of consumer tires. Increasingly, its wealthy customers are driving sports utility vehicles with ever bigger tires. The company anticipates 9 percent annual revenue growth until the end of the decade. That's more than three times the rate at which the broader consumer tire market will probably grow.

On Thursday, Pirelli's owners announced an indicative price range for the IPO that implies an equity value between 6.3 billion euros and 8.3 billion euros. So at the mid-point, Pirelli's equity would be worth about the same as when it de-listed in 2015. That doesn't make it a bargain.

Since 2015, the company has separated its lower margin industrial tires business. That's good for the equity story but it means Pirelli has fewer assets and less revenue -- industrial tires had accounted for about one-fifth of sales. Pirelli is also carrying more net debt, some 4.2 billion euros at the end of June, or almost 4 times Ebitda. It plans to pay that down to less than 2 times by 2020. 

Including debt, Pirelli would be valued at as much as 10.5 times this year's expected Ebitda.  That's about double what investors ascribe to most peers and similar to luxury goods company Prada SpA. While fans have on occasion dubbed Pirelli the "Prada of tires", the company's no fashion house (Pirelli calendar aside).  

Worth the Premium?
Pirelli's owners want the tiremaker to be valued more like Nokian than Michelin
Source: Bloomberg, Gadfly calculations
*at upper end of indicative price range

In valuation terms, the sector star is Finland's Nokian Renkaat Oyj, which trades on more than 11 times estimated Ebitda. But its tire operating margins are far superior to rivals. Two-thirds of its business is related to winter tires.

Room for Improvement
Pirelli's tires are racy but its operating margins aren't yet in pole position
Source: Bloomberg, Company reports
Pirelli ebit margin is adjusted for amortization of intangible assets and restructuring expenses. In 2016 Pirelli's unadjusted operating margin was 13.8%.

Investors wanting exposure to a pure consumer tire company should be willing to pay a little more than they would for a diverse car parts conglomerate such as Continental AG. You don't get all the lower margin and structurally challenged stuff lumped in too. But like those rosy-hued tires, the extreme end of Pirelli's value aspirations might prove too much for some tastes. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Michelin expects the passenger cars and light truck tire market to expand 2.5 percent a year until 2020 

  2. I've assumed revenues expand 9 percent in line with the company's long term guidance and that it achieves a 22 percent ebitda margin. 

  3. Nokian is also quite focused on the replacement market, where arguably it's easier to dictate pricing. Pirelli also sells to the aftermarket but prides itself on direct relationships with luxury carmakers.

To contact the author of this story:
Chris Bryant in Berlin at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net