Italian equipment manufacturer Brembo falls out of favor with the market

Motorsports enthusiasts are all too familiar with the products of the Italian braking systems specialist, which are increasingly being fitted to high-end street vehicles in addition to the track.

Once held in MarketScreener's Europe portfolio, Brembo is unsurprisingly bearing the brunt of a grim economic climate in the automotive sector.

However, these costs have been kept to a minimum: year-on-year, sales are stable and operating profit is down by just 5%. Both have doubled over the past decade, as has EPS.

Although highly capital-intensive, Brembo's business still generates a double-digit return on equity with limited recourse to leverage; it also generates free cash flow, which has enabled the group to triple its dividend payout over the last decade.

Not much has changed since our last earnings commentary, in which we pointed out that, over the past ten years, Brembo's enterprise value has oscillated in a well-defined corridor between 10x and 15x operating profit; it is currently trading at 9x operating profit, i.e. at historic lows.

Stormy weather or not, the group controlled by the highly respected Bombassei family is keeping its feet on the ground, and continues to invest in its development: modernizing production capacities in Italy, opening a factory in Thailand, and acquiring the Swedish company Öhlins last October.

This suspension systems specialist is also well known to motorsports enthusiasts, particularly Moto GP and Superbike fans. Like Brembo, it enjoys a reputation as a top-quality equipment manufacturer among them, so the two groups were made to get along, at least on paper.

MarketScreener analysts note that Öhlins was acquired at a multiple of three times sales and fourteen times EBITDA. Brembo, for its part, is currently valued at less than one times sales and between 5x and 6x EBITDA.