On Tuesday, Goldman Sachs (NYSE:GS) upgraded Pirelli & Co (PIRC:IM) (OTC: PLLIF) stock from Neutral to Buy, setting a new price target of EUR7.10, up from the previous EUR6.40. Goldman highlighted Pirelli's consistent delivery of industry-leading margins, which are expected to persist in the coming years.
Pirelli, recognized for its superior earnings growth compared to its competitors in the tire industry, is currently trading at a 6.5% discount to its peer group average and a 7.2% discount to its own historical average based on the next twelve months' earnings per share (EPS). This valuation gap is seen despite the company's strong performance, with margins forecasted to be 320 basis points above its peers by 2024.
The analyst also pointed out Pirelli's significant strides in reducing its debt. The company's net debt at the end of 2024 is estimated to be €1.93 billion with a leverage ratio of 1.3x, a marked improvement from €3.22 billion and a leverage ratio of 2.8x at the time of its initial public offering in 2017.
When examining Pirelli's enterprise value to earnings before interest and taxes (EV/EBIT), the stock is trading at approximately 8 times EV/EBIT, which represents a more than 15% discount to its historical average. This undervaluation presents a favorable outlook for the stock, according to Goldman.
Looking ahead, with the leverage ratio expected to approach 1.0x by the end of 2025, Goldman Sachs anticipates the potential for enhanced shareholder returns to be a central discussion point this year. This is supported by Pirelli's robust free cash flow yield projections of 10.4% for 2025 and 11.5% for 2026, further underscoring the company's financial health and the opportunity for increased returns to investors.
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