Brembo is the world leader in the design and production of high-tech braking systems for cars, motorbikes and industrial vehicles, serving both original equipment manufacturers (OEMs) and the after-market (AM). It is uniquely recognised by its signature red colour calipers sought-after by many auto aficionados.
Founded in 1961 in Bergamo (northern Italy) by Emilio Bombassei and Italo Breda, it has evolved from a small mechanical workshop that has been producing brake discs for cars since 1964 with its first supply contract with Alfa Romeo, and for motorcycles since 1972, while also venturing into Formula 1 in 1975 with Ferrari.
The company listed on the Milan Stock Exchange in 1995 to support the strategy of growing from local champion to fully-fledged multinational with 19 production facilities in 14 countries and three continents. The primary goal of the international expansion was to establish a presence in the countries where the group’s main clients have production plants, so that products can be supplied more rapidly and more efficiently. Today the group has a workforce of over 11.000 employees, approximately 10% of whom are engineers and product specialists engaged in vital R&D activities.
Products and production
In 2021 Brembo generated over €2.7 billion in sales (quickly recovering from the 2020 Covid-related dip and surpassing the 2019 level) and around €230 million in net profits. Geographically, the major end markets are North America (25% of sales), followed by Germany (18%), China (15%) and Italy (11%), with the Asian markets growing at the highest rates (15%-20% p.a.).
While also manufacturing seats, seat belts and other components used in racing, Brembo is renowned for its brake discs (‘rotors’) and calipers sold across a range of market segments, from Formula 1 and World Rally right down to the high-end & premium mass markets (including for example the discs for all BMW and Mercedes manufactured in the US). Brembo has however been also shifting more and more into the mass market segments, as evidenced by Tesla’s decision to use its products on the front wheels of its lowest priced Model 3 (all other Tesla models have Brembo brakes on all wheels, including parking brakes): the new factory in Mexico has been set up to support Tesla in the ramp-up of its production, but it also serves several other auto manufacturers in North America, so its future is not dependent on a single manufacturer’s fortunes.
[Incidentally, Polyphony Digital Inc., the developer of the Gran Turismo™ series for Playstation consoles, has chosen Brembo has official technical partner for the braking systems for Gran Turismo 7, the new video game that will be available for PS4 and PS5 consoles from March 4.]
By reporting segment, the group operates in the following:
Passenger cars (72% of revenues): offering a comprehensive product range, Brembo is a leader in the international market for brake discs, calipers and complete OE braking systems
Motorcycles (12% of revenues): discs, calipers and master cylinders used by some of the most prestigious brands in the world, including Harley Davidson, Ducati, BMW and KTM
Commercial light vehicles (11% of revenues): Brembo produces extremely reliable braking systems for every category of commercial and industrial vehicle; in the spare parts market, products focus on brake discs with a large, reliable range that almost fully covers the European vehicle park
Racing (5% of revenues): Brembo offers a full range of high-performance products (including clutch systems) designed specifically for motor races and car enthusiasts
Brembo is the official supplier to the Ferrari F1 Racing team in addition to working with many other teams in different categories: since 1975, its products have “won” 26 Formula 1 World Driver Championships and 30 World Constructors’ Championships. Just as an example, in 2020 Brembo’s braking systems (including calipers and clutches) were used by:
F1 Drivers and Constructors champions (Lewis Hamilton / Mercedes)
F2 Drivers and Constructors champions (Mick Schumacher / Prema Racing)
F3 Drivers and Constructors champions (Oscar Piastri / Prema Theodore Racing)
Formula E Drivers and Constructors champions (Antonio Felix da Costa / DS Techeetah)
IndyCar Drivers’ champion (Scott Dixon)
Indy500 winner (Takuma Sato)
World Rally Championship (WRC) Constructors champions (Hyundai Motorsport)
MotoGP Drivers and Constructors champions (Joan Mir / Ducati)
This “moat” is protected by strong brand-equity, intensive R&D advantage, and long-standing, often sole-supplier relationships with premium OEMs.
Brembo has grown in three major stages:
in the 1970s it became the leading braking systems manufacturer for Formula 1 racing working in close collaboration with the teams and individual pilots
in the 1990s it captured most of the luxury car market (i.e. mass production of Ferrari, Lamborghini, Maserati, Porsche, etc)
in the 2000-2010s the company expanded to mid-premium markets (i.e. Mercedes, BMWs, high-end SUVs of GM and Jeep, etc.)
The history of the company’s development is important for the understanding of its current brand strength which is very difficult to replicate for other brakes manufacturers due to their less-focused efforts on high-end braking modules and their brand dilution from the lower end of the range of the products.
Brakes have two important distinguishing features that have allowed Brembo to build its premium brand: visibility and performance-defining characteristics. First, brake calipers are easily recognisable from the outside. Second, brakes are not only critical for the car safety but are also a critical element when it comes to better control over the vehicle in corners and minimising residual torque brake (i.e., unwanted friction). Brembo’s products are unique because they have more braking efficiency with less weight than their alternatives – a key feature for high performance sports cars and motorbikes. In short, Brembo offers a great differentiated product to the most demanding customers.
On top of perceived quality and value, Brembo has recognised very early the importance of design for its products in the luxury car segment and prides itself on the eye-catching beauty winning multiple industrial design awards. In the spirit of close collaboration with OEMs, Brembo has been offering more than 100 colours for its calipers (often labelled with OEM’s name depending on the customer’s preference) to best fit the design of a new car. Strong brand equity translates into a higher willingness to pay by the end customer, especially in the premium segment. This branding feature makes it one of the rare third-party parts brands that are visually promoted by car manufacturers.
Its main competitive advantage, however, remains, the economies of scale. Their high market share and high plant utilisation rates allow the company to leverage fixed costs over millions of units. In addition, it can also leverage the R&D spend. This combination of superior products and lower relative cost is what allows them to enjoy multi-decade relationships with many leading automotive original equipment manufacturers.
Not only Brembo has manufacturing plants all over the world close to their customers, they are also operationally efficient and vertically integrated up to the aluminium and cast-iron foundries to achieve better quality of materials. Parts for the calipers arrive from its own foundries and are then further refined via machining, milling and washing processes.
Improved logistics and a high degree of automation now allow for much faster run times, crucial for small bespoke batches. Unlike other auto parts (i.e., tires), high-performance brakes require a long, customised development process for every new car model: the performance of a braking system is determined not only by high-quality materials and leading technology, but critically by the right balance of torque power, thermal resistance, compact size, and minimum weight – all developed in close collaboration with OEMs and extensively tested before production. Client specifications are high: customers such as Ferrari and Porsche require their calipers to be painted and branded to exacting requirements, and then checked individually by hand.
This unique customer value proposition is supported by the adaptive operating model employed by Brembo, with manufacturing settings largely set up anew for every new caliper model. The company has tailored its factories to highly customised small-batch orders of premium OEMs by allowing for high production flexibility to react to the changing market needs quickly. Big volume orders are treated differently to more specialised orders: for example, Harley-Davidson have a dedicated, fully automated line, while Lamborghini’s low(er) volume orders are accommodated by a highly flexible production setup elsewhere.
Reaching these economies of scale was necessary before moving into the mid-premium segment (step 3 highlighted above): today Brembo effectively has premium braking systems at its core (low volumes, high degree of customisation, high R&D expenses, but also resilience in a market downturn from the luxury sector exposure), and can monetise scalable opportunities in the mid-premium segment by leveraging its brand and technology from the premium core. The Japanese manufacturer Akebono tried the opposite strategy of going from mid-quality brakes to the high-end but failed to achieve positive margins in the high-performance segment and needed a capital infusion from its largest shareholder Toyota to survive.
Innovation
Niche products and consistently high spending on R&D over the last few decades have led to high levels of intellectual property. The classic wisdom is that “my capex is your barrier to entry”, and Brembo routinely spends over 5% of sales on R&D (vs. less than 4% for Akebono and around 1%-2% for tyre producers).
The en-bloc (i.e., forged as a single piece) fixed aluminium caliper was first used in F1 back in 1987: twelve years later the company introduced the same type of aluminium en-bloc calipers for Porsche and since then captured 80% of the whole newly created market. This ability to produce innovative solutions for its customers enables Brembo to win massive market share in the niche segments and consequently charge a high premium feeding into margins as a benefit from its often sole-supplier position.
Another example: the carbon ceramic disks were initially designed in 2002 for the Ferrari Enzo. Carbon ceramic offers substantial benefits in terms of performance: weight, comfort, corrosion resistance, durability and high-tech appeal. The manufacturing process is complex and involves mixing various compounds, moulding them, and then heating the product at 1.000 °C for two days in a controlled and stable atmosphere. The result is a reinforced but porous carbon composite which reduces the original weight by 30%. A second baking at 1.500 °C allows melted liquid silicon to infiltrate the space vacated by evaporated resin. The result is a silicon carbide that is highly heat resistant, durable and at least 50% lighter than the original elements. Crucially, because the carbon ceramic is manufactured at a higher temperature, it can withstand the kinetic energy released during the braking process.
Today, R&D activities are carried out in 5 centres located in Italy, US (Plymouth, Michigan), China, Poland and India. Last year it also opened its first “Centre of Excellence” in the Silicon Valley, which will focus on strengthening the company’s expertise in software development, data science and artificial intelligence.
This was the prologue to the unveil last October of Sensify, a new pioneering intelligent braking system that combines the current product portfolio with digital technology to create a flexible platform to control the brake system digitally. Sensify is also a more sustainable braking solution: thanks to the optimised braking action on each wheel combined with the absence of drag between pads and discs, emissions are minimised. Sensify will be available starting in 2024 with a “highly respected customer” (they didn’t want to name this manufacturer yet) and according to the company “it is comparable with the breakthrough that ABS was in the 1990s on the braking system”.
An ideal Berkshire Hathaway target company
This is pure blue-sky thinking, as Brembo is not up for sale, let alone ever being in contact with BRK in any way. But it is exactly the type of company that would fit perfectly into Buffett’s stable of quality companies, as it ticks all of his criteria for an acquisition as they are periodically stated in his annual letters.
Simple and resilient business. The sector is indeed subject to continuous technological improvements, but at its core the business is very simple: producing braking systems to stop moving vehicles. Economies of scale and R&D are definitely success factors, as are reputation and distribution capabilities (Brembo has all of them): but the threat of disruption or substituting products is very low. It is also resilient, as braking is one of the few areas of car design that has not been up ended by electric vehicles: quite the opposite, as it looks likely to benefit (more later in the post).
Demonstrated consistent earning power. Brembo is neither a start-up nor a turnaround situation: it has always been profitable, steadily growing its operating profits, net earnings and free cash flows. Revenues contracted in both 2009 and 2020, but it still managed to churn out positive numbers: in 2021 it did around €300m in operating profits, and even in 2020 it was €175m.
(Good) management in place. Brembo has been a family-owned business since its foundation, with the Bombassei family still owning 53% of the shares: its members have always been taking an active part in the company’s management, with Alberto Bombassei (son of founder Emilio) being involved with the company from its very beginnings, although being just 20 years old at the time. Last December he was elevated to the Chairman Emeritus position (after all, he is 81 years old…), with Matteo Tiraboschi (his son-in-law) taking his place as Executive Chairman. The current CEO, Daniele Schillaci, has been in charge since 2019: he was previously Executive Vice President at Nissan responsible for global sales, marketing and EVs.
Management has always shown a conservative approach to capital allocation, eschewing for example the temptation to buy back shares in a rising market (dividend pay-out is typically around 30%): it has always preferred to reinvest in R&D and the expansion of new geographical markets, but without forgoing profitability.
Businesses earning good returns on equity while employing little or no debt. Being a cyclical industry, return on capital fluctuate a lot: it was obviously down in both 2008-2009 and 2020, but over longer periods ROE normally averages at 18%-20% (it was around 15% for 2021). Margins are also cyclical, but have historically increased thanks to an improved operating leverage (operating profits have grown much faster than revenues in the past 10 years). And this was achieved while actually reducing the debt employed in the business: gearing, as measured by the often-useless net debt/EBITDA has decreased from 2.5x/3x 10 years ago to ~0.5x today (when subtracting maintenance capex from EBITDA gearing is still well below 1x).
As per company guidance, net financial debt as at 2021 was around €520 million (due in part to two acquisitions last year in the motorbike segment: J.Juan in Spain for €73m and SBS Friction in Denmark for €30m). Not included in this calculation are approximately €300 million in “investments in other companies”, the vast majority of which is a ~5% stake in Pirelli, the Italian tyre manufacturer, worth today around €280m. Brembo built this position starting in March 2020, but it’s not clear why, especially considering that in 2018 they vigorously denied any rumour that they were looking at Magneti Marelli (at the time about to be spun-off from Fiat Chrysler: “a very nice company but it is not our target”). Today Brembo is sitting on a nice capital gain on the Pirelli investment, but the company has clearly said that the position is for the mid-long term and selling the shares is currently not being discussed. Anyway, liquidity is not an issue here.
Financials
The company has been consistently growing its sales by 8%-9% annually over the past 10-15 years. More important, it has now largely completed its expansion programme undertaken during 2016-2019 with the completion and/or restructuring of plants in Mexico, Poland and China which are now fully operational. FCFs have been depressed over this period but the company should now be ready to reap the benefits of investments once the market revives, sustaining its ROIC at ~18%.
Going forward, the company’s growth prospects are three-fold:
Ramp-up of the existing capacities to reach the planned volumes: as discussed above, the company has largely completed its expansion investments. Today, Brembo owns the first and only Chinese plant for high-end aluminium calipers (where it holds an almost 100% market share serving European, Japanese and American customers operating in the country), a new foundry in Mexico (to better cover North America) and improved the Polish plant for mid-premium rotors (oriented towards EU markets).
Recovery of the premium car market from the slow point of the cycle: the auto market has started to slow down in 2019 and was further hit by the short-term supply chain disruptions and demand slump due to the coronavirus outbreak in 2020. However, the premium auto market is generally less susceptible to the broad economic slowdowns and therefore should quickly recover to the previous levels.
Fundamental shift to high-performance braking systems in EV: unlike other suppliers to OEM, Brembo is favourably positioned to the new EV trends. Due to the heavy batteries installed, EVs are much heavier than ICE analogs, and thus require increased braking effort to decelerate. Therefore, EV engineers need to optimise braking systems for two parameters simultaneously: 1) weight reduction (lighter materials, replacement of hydraulic system with brake-by-wire, etc.); and 2) high-quality, since greater braking effort is required for safety reasons and minimum residual torque (i.e., redundant friction from the pads when no braking is necessary) is desired to increase energy efficiency/mileage per kWh. All these factors make Brembo’s offerings even more compelling (in addition to Tesla, it was chosen as a preferred supplier also by Nio): a few extra dollars spent on a braking system should be more than offset by economies on the battery capacity with an additional kicker from the increased car’s appeal to the end-customers.
Valuation
Currently, Brembo is trading at a P/E of 17x (20x on an unlevered basis) both on trailing and 5Y core earnings, an EV/EBIT of 13x (again, both trailing and 5Y) and a 5.5% FCF yield: not demanding for a high-quality company, which is not growing like a Saas but which has increased book value by 18% p.a. over the last decade.
Ok, fair point: book value might be an outdated and not reliable metric to measure value. But consider that it does not include the intangible value of R&D: these costs are not capitalised but rather expensed every year in the P&L. Intangible assets generated in the development phase of internal projects are capitalised only if they can demonstrate: a) the ability to use or sell them; and b) how the intangible asset will generate probable future economic rewards.
At the current price of ~€12, on an EV/Replacement cost basis Brembo is trading at around ~1x.
While I don’t’ particularly like EV/EBITDA (in general and even less for capital-intensive industries), Brembo is trading today at 8x: over the last five years companies in the sector have been acquired by trade buyers at EV/EBITDA multiples ranging from 8x to 13x, depending on the target’s size, ownership, specialisation, … And none of these companies were as good as Brembo!
Finally, reinvested profits are a key part of intrinsic value, yet are not reflected in P&L earnings. “Owner earnings” are thus an important and insightful short-cut metric to assess intrinsic value. Brembo’s ongoing investment and prudent accounting means that today’s owner earnings are significantly higher than P&L earnings (depreciation being ~2x maintenance capex).
Conclusions
Brembo earns industry-leading margins by charging OEMs (and ultimately end-customers) high premiums for trusted quality, uncompromised reliability, and tight fit into OEMs’ supply chain and design process.
It looks to me like a classic steady compounder: despite reinvesting heavily in R&D and new capacity in the last decade, it has sustained/increased its ROE cycle-to-cycle. It has now achieved global production footprint, vertical integration in the critical materials, and a high degree of production automation, further increasing speed-to-market with the additional benefit of cost cuts. The bet to expand US manufacturing and sell into the US market more than a decade ago has paid off nicely: China - where it has been investing heavily in recent years - could be a repeat. Other brakes suppliers can’t replicate its success as it would require immediate sacrifices to their high-volumes/low-cost strategy, while Brembo’s position is further protected by its established brand and long-standing relationships with premium OEMs. Superior margins should therefore be sustainable going forward.
While value it’s in the eye of the beholder, it likely trades at a discount to its private market value. One of the reasons is that Brembo is family-controlled with a limited float: although the Bombassei family has been reducing their stake in the last few years, it is unlikely that they will ever go below 50% and thus make the company a potential takeover target. Similarly, Brembo is far from a “dream” company for an investment bank: no bond issues and very little M&A activity. As far as I know, it is only covered by 7-8 sell-side analysts, mostly Italian banks or regional brokers with a presence in Italy. As such, it is well known by car enthusiasts but largely ignored by international funds.
The stock is not going to double over the next 12 months (using the sell-side favourite lingo: there are no apparent catalysts on the horizon), but it should grow its intrinsic value over time and provide a satisfactory return for a long-term, patient investor with reasonable downside protection.