Shares of Knorr-Bremse rose 1.6% on Thursday after JPMorgan moved the company onto a positive catalyst watch as it waits for the firm’s second-quarter results. The bank said its updated view shows a more attractive risk-reward profile than it had expected in its initial preview.
JPMorgan analyst Akash Gupta reported that the bank is now 3% above pre-second-quarter consensus on sales and 4% above on adjusted EBIT. The analysts highlighted stronger North American truck orders released after the bank’s first preview as a potential source of upside to Knorr-Bremse’s commercial vehicle order intake.
On margins, JPMorgan forecasts a first-half adjusted EBIT margin of 13.9% and sees "potential for an upgrade to full-year adj EBIT margin guidance of ~14%." The bank’s catalyst watch is anchored largely on a rebound in North American truck orders.
ACT Research data released July 6, which JPMorgan referenced, showed preliminary Class 8 net orders of 31,400 units in June. That figure was up 18% versus May and up 231% from a year earlier. Broader Class 5-8 orders increased 138% year-over-year to 52,100 units, according to the same data.
JPMorgan said industry-wide Class 8 orders for the second quarter overall were up 169% year-over-year, a rebound the bank attributed to pre-buying ahead of new EPA emissions standards. Because North America is Knorr-Bremse’s most profitable region for its commercial vehicle systems (CVS) business, JPMorgan’s team said the order strength "bodes well for margin recovery" in the second half of the year.
For the quarter itself, the bank projects orders of €2.20 billion and revenue of €2.15 billion, up 7% year-over-year and 3% above consensus. JPMorgan models adjusted EBIT of €305 million, up 16% year-over-year and 4% above consensus, driven by 110 basis points of margin expansion.
Knorr-Bremse is scheduled to present results alongside new medium-term targets. JPMorgan noted the company has already exceeded its prior rail (RVS) margin target of above 16%, while its commercial vehicle margin target of above 13.5% has not yet been achieved, in part due to weakness in the U.S. market.
The analysts expect management to reiterate the 13.5% CVS target while setting a new RVS target above 19% and to raise its return-on-capital-employed goal from the previous above-20% level. JPMorgan added that "with a potential Q2 beat and guidance upgrade in sight, the market may see the new targets as conservative."
Despite the more constructive near-term view, JPMorgan reiterated a Neutral rating on the stock, citing "very limited upside" to its price target of €108.
Summary
JPMorgan has put Knorr-Bremse on a positive catalyst watch ahead of Q2 results after revising its sales and adjusted EBIT estimates modestly higher and pointing to stronger North American truck orders as an upside driver. The bank anticipates potential margin upgrades but kept a Neutral recommendation because of constrained upside to its €108 price target.
Key points
- Analyst update: JPMorgan is now 3% above pre-Q2 consensus on sales and 4% above on adjusted EBIT estimates.
- Order momentum: ACT Research data cited by JPMorgan show June Class 8 net orders at 31,400 units, up 18% from May and 231% year-over-year; Class 5-8 orders rose 138% year-over-year to 52,100 units.
- Forecasts and targets: JPMorgan projects Q2 orders of €2.20 billion, revenue of €2.15 billion and adjusted EBIT of €305 million; the bank expects management to reiterate a 13.5% CVS target and to set an RVS target above 19%.
Risks and uncertainties
- Limited upside to valuation - JPMorgan reiterated a Neutral rating because of "very limited upside" to its €108 price target, which constrains potential near-term share appreciation.
- Commercial vehicle margin shortfall - The company’s CVS margin target of above 13.5% "remains out of reach," partly due to weakness in the U.S. market, posing uncertainty for margin recovery.
- Order composition - JPMorgan attributed the industry rebound in Class 8 orders to pre-buying ahead of new EPA emissions standards, a factor that may affect the sustainability of order momentum.