Acquisition Of Roofing Corp Of America And Restoration Demand Will Strengthen Market Position In 2025

Key Takeaways

• Acquisitions and integration in the roofing segment are driving significant revenue growth and are expected to boost future earnings through scaled efficiencies.
  
• Weather-related demand in the restoration segment, despite slow backlog conversion, and stabilized budget pressures in residential, support mid-single-digit growth expectations.
  
• Rising costs and external factors across divisions, including insurance, interest rates, and currency fluctuations, threaten FirstService's profitability and revenue growth.

Catalysts

Provides residential property management and other essential property services to residential and commercial customers in the United States and Canada.

• The acquisition of Roofing Corp of America and the successful integration of Crowther and Hamilton are expected to significantly boost revenue growth in 2025, contributing to a projected 50% revenue increase in the first quarter for the roofing segment. This expansion will primarily impact the revenue line positively.
  
• FirstService's restoration segment is benefiting from increased weather-related events, such as the hurricanes and wildfires, which have boosted leads and increased backlog. This external catalyst is expected to drive mid-single-digit growth in revenue for the segment, despite slow backlog conversion, impacting future earnings positively as projects are completed.
  
• FirstService Residential is working through temporary budgetary pressures among its communities, with expectations of a stabilization and a return to mid-single-digit organic growth in the later parts of 2025. This recovery is expected to stabilize revenues and potentially improve net margins as budget pressures ease.
  
• Continued tuck-under acquisitions, particularly in the roofing segment, are expected to sustain growth momentum. This ongoing acquisition strategy projects mid-single-digit organic growth for the full year while establishing a solid foundation for future revenue expansion and enhancing earnings through scaled efficiencies.
  
• The company’s ability to maintain and incrementally increase its dividend while managing leverage and capital investment reflects solid fiscal health and shareholder value creation, potentially improving perceptions of valuation and supporting earnings per share (EPS) growth over time.

FirstService Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FirstService's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.6% today to 3.6% in 3 years time.
• Analysts expect earnings to reach $231.6 million (and earnings per share of $4.98) by about April 2028, up from $134.4 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 50.2x on those 2028 earnings, down from 58.2x today. This future PE is greater than the current PE for the CA Real Estate industry at 9.5x.
• Analysts expect the number of shares outstanding to grow by 1.04% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.48%, as per the Simply Wall St company report.

FirstService Future Earnings Per Share Growth

Risks

• The company faces budgetary pressures in the FirstService Residential division due to rising costs, including insurance premiums and legislated increases, which could impact future revenue growth and net margins.
  
• The restoration segment relies on unpredictable weather events for significant portions of its revenue, which makes future earnings volatile and difficult to forecast reliably.
  
• Noncash foreign exchange adjustments and increased corporate costs have negatively impacted EPS, indicating potential ongoing risks to profitability and net margins due to currency fluctuations.
  
• Rising interest costs, driven by higher rates and increased debt levels, have tempered EPS growth, suggesting a potential risk to future earnings if the interest rate environment does not stabilize.
  
• The implementation of tariffs may impact consumer confidence and delay market improvement in the home service brands segment, potentially affecting revenue growth and net margins.

Valuation

• The analysts have a consensus price target of CA$282.354 for FirstService 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 $6.4 billion, earnings will come to $231.6 million, and it would be trading on a PE ratio of 50.2x, assuming you use a discount rate of 7.5%.
• Given the current share price of CA$238.55, the analyst price target of CA$282.35 is 15.5% 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.