Pirelli's Downgrade and Continental's Upgrade in Tyre Sector

Investing.com — Pirelli's (BIT:PIRC) status as a market favorite in the tyre sector has taken a hit as Bernstein analysts downgraded the company to "underperform," citing company-specific risks not reflected in its current valuation.

Conversely, Continental (ETR:CONG) has received an upgrade to "market-perform," buoyed by its exposure to positive trends in the European replacement tyre market and a lack of immediate negative catalysts.

Risks Highlighted for Pirelli

Bernstein flagged three primary risks for Pirelli heading into 2025:
1. Potential Tariffs: Under a more protectionist U.S. administration, tariffs could significantly impact Pirelli's earnings. Unlike peers with U.S. production, Pirelli sources about 60% of its U.S. demand from Mexico. A 25% tariff on imports from Mexico could yield an 8–16% hit to its EBIT, despite mitigation measures.

2. Consumer Downtrading: Pirelli is vulnerable to downtrading, especially in the U.S. market. With a high revenue share from premium products, its lack of lower-tier brands exposes it to shifts in consumer behavior amid economic pressures. The premium-heavy portfolio is also at risk from a slowdown in electric vehicle production.

3. Governance Concerns: Italian authorities are investigating Pirelli's major shareholder under "Golden Power" legislation, creating uncertainty around potential outcomes, including a forced stake sale.

Due to these factors, Bernstein revised Pirelli's target price down to €4.60, reflecting a 12% downside from current levels.

Continental's Position

In contrast, Continental's position has improved due to favorable conditions in European replacement markets, a high-margin segment where the company has significant exposure. Analysts note that Continental’s tyre margins appear to have bottomed out, with room for expansion through 2025. The automotive segment, facing structural challenges, is unlikely to overshadow near-term performance due to ongoing cost-cutting measures and the anticipated spinoff by the end of 2025.

The absence of immediate risks and potential margin recovery in its core tyre business justify Continental's upgrade, with a target price set at €60, indicating a slight downside of 5% but reflecting stabilization in its outlook.

Industry Outlook

While Pirelli contends with specific headwinds, the tyre industry is positioned for modest growth in 2025. Bernstein expects replacement tyre demand to outpace original equipment markets, leading to revenue growth and margin expansion across the sector. However, Pirelli's unique risk profile necessitates caution among investors.

Shares of Continental were up 1.7% at 8:35 ET (13:35 GMT).