J.P. Morgan Downgrades Knorr-Bremse to Neutral Amid Struggling North American Operations and Dim Growth Prospects

J.P. Morgan has recently shifted its stance on Knorr-Bremse (ETR: KBX), downgrading the company's rating from "overweight" to "neutral." This decision stems from a rather dreary outlook for their operations in North America, which is proving to be a significant concern for investors. After enjoying a robust 21% increase in stock value so far this year, the analysts at J.P. Morgan now see limited room for further gains without new positive developments on the horizon.

The analysts have kept the price target steady at €93, based on their projections extending into December 2026. However, the downgrade has been prompted by an anticipated decline in earnings and revenue figures, primarily driven by the slack in the North American trucking sector along with unfavorable foreign exchange dynamics.

Particularly worrying is the performance of Knorr-Bremse's Commercial Vehicle System (CVS) segment, which accounted for about 38% of the firm's revenue in the region last year. The decline in heavy truck orders is notable, plummeting by 48% year-over-year in the first two months of the second quarter. Additionally, build rates have decreased by roughly 19%, further indicating a downturn.

An additional layer of trouble arises from the diminishing pre-buy demand in light of weakened U.S. emissions standards, which has negatively impacted expectations. Consequently, J.P. Morgan has revised its growth forecast for the CVS segment, downgrading it to -1% for 2025, a drop from their previous estimate of 0%.

For the second quarter, J.P. Morgan anticipates group orders to hit approximately €2 billion, with revenues at €1.97 billion and adjusted EBIT around €252 million-each forecast falling 3-5% short compared to consensus estimates. While RVS (Rail Vehicle Systems) revenues are expected to experience a 9% increase year-over-year, the CVS segment is projected to take a hit with a potential 14% decline. The adjusted EBIT margin for the quarter is estimated to rest at 12.8%.

In Germany, the company's second-largest market, the expected gains from government stimulus initiatives in 2025 are considered minimal. Their involvement in passenger trains-which is a long-cycle business-along with a lack of signaling systems, would likely result in slower growth tied to infrastructure spending. Although tax breaks from accelerated depreciation may provide some relief for CVS, overall effects from government stimulus appear largely tepid this year.

Moreover, J.P. Morgan sees risks to Knorr-Bremse's full-year guidance. The company has outlined expectations of revenue between €8.1 billion and €8.4 billion for 2025, or an operating EBIT margin from 12.5% to 13.5%. However, the brokerage's forecast puts revenue closer to €8.05 billion and a margin of 12.8%, leaning towards the lower end of expectations.

Adjusted earnings per share (EPS) estimates for 2025 and 2026 have been revised down, now forecasting at €3.62 and €4.45, marking a 5-6% decline from previous projections. The valuation for Knorr-Bremse is anchored at 13 times the 2027 estimated EV/EBIT. There is potential for margin improvements through asset divestitures, particularly in the RVS sector, where two assets are currently being divested. Nonetheless, J.P. Morgan does not foresee significant developments until late 2025 or 2026.

Lastly, the analysts expressed concerns that if Knorr-Bremse does not engage in successful bolt-on acquisitions to offset earnings lost from divestitures, there could be a further decline in EPS. As stock traders watch closely, the implications of J.P. Morgan's analysis could very well influence market sentiment regarding Knorr-Bremse in the near term.