Hydropower And Green Transition Poised To Boost Growth, Yet Revenue Decline And Uncertainties Threaten Margins

Key Takeaways

• The company's focus on green technologies and strong project execution could lead to future revenue growth and improved margins.
  
• Strategic restructuring and strong demand in key sectors suggest potential operational efficiencies and sustained earnings growth.
  
• Decreasing revenue and order intake suggest challenges in conversion and market volatility, with restructuring indicating underlying risks and uncertainty in future growth.

Catalysts

Provides plants, equipment, and services for pulp and paper industry, metalworking and steel industries, hydropower stations, and solid/liquid separation in the municipal and industrial sectors in Europe, North America, South America, China, Asia, and internationally.

• The increasing interest in green technologies and solutions industry needs for the green transition, despite being slow in translating to orders, suggests potential future revenue growth as more projects materialize.
  
• The solid project execution and improvements in the mix, including an increased share of the service business and price increases, are positive indicators for maintaining or improving net margins.
  
• Strong demand in the Hydropower sector and sustained project activities indicate possible growth in revenue and earnings as backlog increases and projects materialize in the coming periods.
  
• The announced capacity adjustments and restructuring efforts in response to market challenges in sectors like automotive and pulp could lead to operational efficiencies and improved net margins.
  
• Positive developments and interest in the Environment & Energy business, despite current uncertainties in order placements, suggest potential for significant revenue growth and stable high margins as these markets mature.

Andritz Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Andritz's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.9% today to 5.5% in 3 years time.
• Analysts expect earnings to reach €494.8 million (and earnings per share of €4.95) by about December 2027, down from €500.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €664.1 million in earnings, and the most bearish expecting €441 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.9x on those 2027 earnings, up from 9.7x today. This future PE is lower than the current PE for the GB Machinery industry at 23.6x.
• Analysts expect the number of shares outstanding to grow by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.33%, as per the Simply Wall St company report.

Andritz Future Earnings Per Share Growth

Risks

• Despite the reported increase in order intake, revenue decreased by 3% year-on-year, which could indicate challenges in converting orders to revenue growth, impacting overall financial performance.
  
• The Pulp & Paper segment saw a significant 20% decrease in order intake and revenue, highlighting potential volatility in a crucial business area that could affect overall revenue growth.
  
• The order backlog decreased by 9% year-on-year, suggesting potential revenue contraction and highlighting the difficulty in sustaining a consistent revenue pipeline.
  
• Restructuring activities in sectors such as Metals, particularly Schuler, suggest underlying market challenges and potential risks associated with downsizing, possibly affecting earnings and margins.
  
• Ongoing political and economic uncertainty, as noted in the Environment & Energy sector, may delay the realization of potential project orders, affecting the predictability and growth of revenue streams.

Valuation

• The analysts have a consensus price target of €66.28 for Andritz based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €80.0, and the most bearish reporting a price target of just €40.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €9.1 billion, earnings will come to €494.8 million, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 6.3%.
• Given the current share price of €49.0, the analyst's price target of €66.28 is 26.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.