Composite Turbine Blade And A350 Production Will Improve Global Reach

Key Takeaways

• FACC's innovation in composite materials and rising production rates suggest potential for revenue growth through new contracts and higher component sales.
  
• Strategic global presence and efficient financial management enhance resilience, protecting against geopolitical risks and improving cash flow and earnings stability.
  
• Supply chain challenges, geopolitical risks, and elevated inventory levels may impact FACC's profitability, revenue growth, and cash flow management.

Catalysts

Engages in the development, production, and maintenance of aircraft components worldwide.

• FACC's focus on technology and innovation, as demonstrated by advancements such as the high-performing turbine blade made from composite materials, positions the company for future growth. This innovation could lead to new contracts or partnerships, impacting future revenue positively.
  
• The production rate increases announced for the A350 and other aircraft models signal strong demand. Doubling production rates implies higher component sales for FACC, suggesting significant revenue growth potential in the coming years.
  
• The company's improved free cash flow and active efforts to manage inventory levels, despite supply chain challenges, indicate better financial management and operational efficiency. This focus on cash flow can enhance net margins and earnings stability.
  
• FACC's diversified market presence, including strategic facilities in the U.S., Canada, China, and India, reduces geopolitical risks and provides a competitive edge. This strategic footprint can help protect revenues against regional instabilities.
  
• Ongoing cost-efficiency programs and plans to mitigate rising material costs and inflation pressures, including renegotiations for pricing agreements with customers, could help maintain or improve net margins, driving future earnings growth.

FACC Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FACC's revenue will grow by 9.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.7% today to 4.2% in 3 years time.
• Analysts expect earnings to reach €48.8 million (and earnings per share of €1.07) by about May 2028, up from €6.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.5x on those 2028 earnings, down from 50.4x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 53.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.9%, as per the Simply Wall St company report.

FACC Future Earnings Per Share Growth

Risks

• Ongoing supply chain challenges, including material cost increases and availability issues, especially in the fastener environment, could lead to increased operating costs, potentially impacting the company’s net margins.
  
• Inventory levels remain elevated due to supply chain disruptions and changes in demand, which may strain cash flow and impact working capital efficiency if not reduced as planned.
  
• A slight reduction in the expected ramp-up speed of production rates, linked with harmonizing supply chains and correcting any remaining critical supply chain issues, could impact revenue growth projections if delays persist.
  
• Geopolitical risks and potential tariff impacts, despite current contracts protecting FACC from direct tariff costs, could indirectly affect their competitiveness and profit margins over the longer term.
  
• The negative EBIT performance in the Interiors division and ongoing recovery efforts suggest potential future risks to overall profitability if these challenges persist or worsen.

Valuation

• The analysts have a consensus price target of €10.2 for FACC 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 €12.0, and the most bearish reporting a price target of just €7.6.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €1.2 billion, earnings will come to €48.8 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of €7.0, the analyst price target of €10.2 is 31.4% higher.
  
• 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.