US Water Projects Will Face Tariffs, Delays And Experience Recovery

Key Takeaways

• Tariffs and trade uncertainties threaten project execution, impacting revenue and net margins due to increased operational costs and potential production shifts.
  
• Delays in the U.S. production facility and a focus on smaller projects could limit substantial revenue growth and profitability, affecting future earnings.
  
• Strong revenue growth and strategic restructuring efforts coupled with a shift to higher-margin contracts and alternative strategies could stabilize earnings and improve net margins long-term.

Catalysts

Provides smart water and wastewater treatment solutions for the municipal, commercial, and industrial markets worldwide.

• The potential impact of U.S. tariffs could disrupt approximately $8 million worth of projects, representing less than 10% of annual revenue forecasts. This could affect future revenue growth, particularly within the Municipal Water & Wastewater group in North America.
  
• Manufacturing shifts due to tariffs and trade policy uncertainties, with potential margin erosion, as some production from China may face tariffs when entering the U.S. This impacts future net margins due to increased operational costs.
  
• The delay in completing the U.S. production facility may hinder the company’s ability to capitalize on future Municipal projects with a Buy American clause, potentially affecting both revenue and earnings growth.
  
• The need for significant capital to pursue BOO projects may limit Fluence’s ability to capture larger, profitable contracts, thereby affecting future earnings growth and net margins as smaller projects generally carry lower profitability.
  
• Shifting focus from large CES projects to smaller contracts may hinder substantial revenue growth opportunities in the short term as these smaller contracts are inherently less impactful on top-line financial performance.
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Fluence Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fluence's revenue will grow by 31.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -41.7% today to 3.4% in 3 years time.
• Analysts expect earnings to reach $4.0 million (and earnings per share of $0.0) by about May 2028, up from $-21.5 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 0.4x on those 2028 earnings, up from -1.4x today. This future PE is lower than the current PE for the AU Water Utilities industry at 25.9x.
• 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 6.38%, as per the Simply Wall St company report.

Fluence Future Earnings Per Share Growth

Risks

• Fluence has demonstrated strong revenue growth, with a 65% increase compared to Q1 2024, largely driven by the Ivory Coast Addendum project, which is likely to positively impact their revenue projections.
  
• The company's cost-saving initiatives and restructuring efforts have led to a reduction in SG&A expenses, contributing to a higher EBITDA, which should favorably impact net margins.
  
• With a robust backlog of $83.5 million and new orders showing substantial growth, Fluence is on track to meet its annual revenue targets, supporting a positive outlook for revenue.
  
• The company is taking strategic steps to manage potential tariff impacts by exploring alternative manufacturing strategies, which could mitigate tariff-related margin erosion and protect earnings.
  
• Fluence's plan to increase U.S. production and its focus on building a network of smaller, higher-margin contracts reflect a strategic shift that could improve net margins and stabilize earnings long-term.

Valuation

• The analysts have a consensus price target of A$0.002 for Fluence based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $116.9 million, earnings will come to $4.0 million, and it would be trading on a PE ratio of 0.4x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of A$0.04, the analyst price target of A$0.0 is 2205.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.