Defense Spending And Facility Consolidation Will Eventually Offset Tariff And Industrial Demand Headwinds

Catalysts

About AirBoss of America

AirBoss of America designs and manufactures specialty rubber compounds, defense products and rubber molded components for industrial and military customers.

What are the underlying business or industry changes driving this perspective?

• Although resumption of Bandolier deliveries and higher global defense spending provide a clearer revenue pipeline into 2026, execution risk around raw material availability, government procurement delays and the lengthy delivery cycle could still defer a sizable portion of the remaining 25 million dollars. This may limit near term earnings leverage from defense contracts.
• While the relocation and consolidation of the Jessup facility into Auburn Hills should structurally lower fixed costs and support better utilization, integration disruption, potential downtime and higher upfront capex may dilute the expected margin uplift and delay the full benefit to net margins.
• Although management continues to prioritize innovation in custom rubber compounding and the launch of specialized products, ongoing softness across key end markets such as truck tires and broader U.S. industrial demand could keep ARS volumes below capacity for longer. This may cap revenue growth and depress segment gross margins.
• Despite significant year over year improvement in EBITDA and a reduction in net debt that strengthens the balance sheet, a still elevated leverage profile combined with rising capital investments to support growth may constrain financial flexibility. This could limit the pace at which earnings accretion from new programs can translate into higher free cash flow.
• While AirBoss is positioning to benefit from long term growth in global defense spending and supply chain rebalancing that may favor North American manufacturing, persistent tariff uncertainty, CUSMA renegotiation risk and potential retaliatory trade actions could pressure cross border volumes and pricing. This may weigh on consolidated revenue and compress margins.

Assumptions

This narrative explores a more pessimistic perspective on AirBoss of America compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming AirBoss of America's revenue will grow by 4.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.9% today to 4.3% in 3 years time.
• The bearish analysts expect earnings to reach $19.1 million (and earnings per share of $0.71) by about December 2028, up from $-3.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.6x on those 2028 earnings, up from -23.8x today. This future PE is lower than the current PE for the CA Chemicals industry at 15.1x.
• The bearish analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.45%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent or escalating global and U.S. tariffs, as well as uncertainty around future CUSMA renegotiation, could structurally depress cross-border demand for rubber compounds and molded products, putting sustained pressure on revenue and gross margins over the long term.
• Ongoing softness in key industrial end markets, including truck tires and broader U.S. industrial activity, may last longer than expected as supply chains and customer inventories rebalance slowly. This could limit volume recovery in AirBoss Rubber Solutions and constrain consolidated revenue growth and earnings.
• Greater reliance on defense programs such as Bandolier exposes the company to government procurement cycles, potential shutdowns and raw material bottlenecks. Delays or cancellations could create volatility in the defense order book and reduce the visibility of future revenue and earnings.
• The capital intensive relocation and consolidation of facilities, along with higher ongoing investment in plant, equipment and R&D, could outpace cash generation if volumes disappoint. This could slow deleveraging progress and weigh on free cash flow and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for AirBoss of America is CA$4.99, which represents up to two standard deviations below the consensus price target of CA$5.69. This valuation is based on what can be assumed as the expectations of AirBoss of America's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$6.39, and the most bearish reporting a price target of just CA$4.99.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $446.9 million, earnings will come to $19.1 million, and it would be trading on a PE ratio of 6.6x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of CA$4.42, the analyst price target of CA$4.99 is 11.4% 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.