Flexible Equipment Investments And EV Wins Will Drive Mobility Success

Key Takeaways

• Linamar's strategic investments and new business wins in the Mobility sector indicate potential for future revenue and margin growth.
  
• Cost focus, operational efficiencies, and share buybacks are key strategies for enhancing margins, earnings, and shareholder value.
  
• Declining sales across key segments, tariffs, and market challenges threaten Linamar's revenue, margins, and earnings growth sustainability.

Catalysts

Manufactures and sells engineered products in Canada, Europe, the Asia Pacific, and rest of North America.

• Linamar's significant investment in programmable flexible equipment allows the company to pivot and adapt to changes in market demand, particularly in the Mobility business, thus potentially driving future revenue growth and protecting margins.
  
• The pursuit of takeover work from distressed suppliers in Europe could enhance Linamar’s market share and provide opportunities for incremental revenue and margin improvement as the company leverages its strong balance sheet and financial health.
  
• New business wins in the Mobility sector, including expansion in EV and driveline disconnect technology, suggest an upward trend in future revenue and profitability as these programs launch and scale.
  
• Continued focus on cost improvements, operational efficiencies, and commercial negotiations, especially in Europe, are expected to contribute to net margin expansion and earnings growth.
  
• A robust share buyback program (NCIB) not only supports the stock price but could also lead to enhanced earnings per share (EPS) through a reduction in outstanding shares, benefiting shareholders in the long term.

Linamar Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Linamar's revenue will decrease by 0.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.4% today to 7.7% in 3 years time.
• Analysts expect earnings to reach CA$811.3 million (and earnings per share of CA$14.07) by about May 2028, up from CA$258.3 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 5.5x on those 2028 earnings, down from 12.2x today. This future PE is lower than the current PE for the CA Auto Components industry at 10.4x.
• Analysts expect the number of shares outstanding to decline by 2.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.99%, as per the Simply Wall St company report.

Linamar Future Earnings Per Share Growth

Risks

• The automotive segment faced significant market declines in both Europe and North America, leading to lower volumes and impacting sales adversely. This could further pressure Linamar's revenue generation in these key markets.
  
• Persistent declines in the global agriculture market are expected to continue, impacting the Industrial segment's sales and operating earnings. Such continuous market declines can negatively affect Linamar's revenue streams and margins.
  
• The tariffs imposed by the U.S. on products from Canada and Mexico present a substantial risk of increased costs, potentially leading to higher expenses for Linamar's customers and possibly impacting revenue if those costs cannot be passed on.
  
• Linamar took a significant impairment charge related to European operations due to market deteriorations, indicating challenges in maintaining profitability and margins in the region under current conditions.
  
• Softer sales in the Mobility segment, alongside challenges from delayed or canceled electric vehicle (EV) programs due to lower than expected EV adoption rates, can impair Linamar’s ability to sustain its earnings growth and margin expansion targets.

Valuation

• The analysts have a consensus price target of CA$63.667 for Linamar 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 CA$72.0, and the most bearish reporting a price target of just CA$55.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$10.5 billion, earnings will come to CA$811.3 million, and it would be trading on a PE ratio of 5.5x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of CA$52.29, the analyst price target of CA$63.67 is 17.9% 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.