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March 27, 2017

Wake Up to Italian Coffee Machine Makers, North Square Says

Source: Bloomberg

By Chiara Albanese

(Bloomberg) -- When it comes to Italian espresso-pot designers, investors may be ready for a double shot.

Shares of Bialetti Industrie SpA and De’ Longhi SpA, the two firms best known for making and selling the aluminum stove-top machines, still have upside after a frothy run, according to North Square Blue Oak Ltd., a boutique investment bank which scans the market for attractive bets on behalf of hedge funds and institutional investors.

It’s advising clients to buy shares of both companies, even after gains of 43 percent and 33 percent, respectively, over the last 12 months.

“Bialetti and De’ Longhi are compelling buys,” Mario Russo, a London-based analyst for North Square, said in a phone interview. “These companies are hardly on the radar of larger investors, but they have significant new markets in which they can still grow.”

Although De’ Longhi may appear more expensive than French peer SEB SA on a price-to-earnings basis, it isn’t “if we take into account the fact that SEB has net debt and De’ Longhi has a net cash position,” said Anna Patrice, an analyst at Berenberg who also recommends buying the shares. “There is upside to consensus estimates as the company has potential to further improve margins from 2018 and beyond,” she said.

  • De’ Longhi trades at a 26% premium vs peers, up from an average 16% premium over the past two years on a blended forward price-to-earnings basis, according to data compiled by Bloomberg

  • Among equity analysts who monitor the stock, 3 have buy recommendations, 7 say hold, none say sell

“De’ Longhi is a value story,” North Square’s Russo said. “Margins are increasing, sales are increasing. The company is moving toward a more diverse geographical footprint. It is a cash flow-generation bet. It could become a trade for hedge funds by going long on the stock and selling coffee short as a natural hedge.”

A partnership with Nestle Nespresso SA to co-brand coffee machines has gone a long way toward building De’ Longhi’s trademark in Europe, where it generates two-thirds of its sales, said Russo, who has a price target of 32 euros. It has untapped growth potential in new markets including China, he said.

Bialetti could be a cheaper alternative, he said.

Family-controlled Bialetti, with a market capitalization of just 50 million euros ($54 million), is best known for the iconic Moka pot, a symbol of Italian design enshrined as a museum exhibit in New York’s Museum of Modern Art. Alfonso Bialetti founded the company in 1919 as an aluminium workshop.

  • Bialetti is emerging from a painful restructuring that included re-negotiation of its debt at the end of 2014 and the sale of non-core brand Girmi in April 2016

  • The company is investing in a range of single-brand shops, sprouting up across Italy’s major cities with a chain of more than 80 concept stores

“The industrial plan is affordable and can create terrific value for its shareholders,” Russo said. “The company is undervalued,” he said, adding that the shares trade at just six times earnings before interest, tax, depreciation and amortization. The stock has the potential to rise to about 15 times Ebitda, he said.

“Italian coffee could taste really good in the coming months,” Russo said.

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