Adoption Of IP And Cloud Solutions Will Present Opportunities, Yet Rising R&D Costs May Pressure Margins

Key Takeaways

• Evertz's focus on IP and cloud solutions will drive future revenue growth as global demand for high-quality video increases.
  
• Strategic U.S. manufacturing expansion aims to mitigate tariff impacts, potentially improving future margins and maintaining competitive pricing.
  
• Declining international revenue, challenging margins, potential tariff impacts, U.S. operational expansions, and rising R&D expenses pose significant risks to profitability.

Catalysts

Engages in the design, manufacture, and distribution of video and audio infrastructure solutions for the production, post-production, broadcast, and telecommunications markets in Canada, the United States, and internationally.

• Evertz's strong financial performance is attributed to the increased global demand for high-quality video anytime, anywhere and the adoption of IP-based and cloud solutions. This is expected to boost future revenue as these trends continue.
  
• The ongoing technical transition to IP, IT, and cloud-based architectures in the media industry is a key growth driver, potentially impacting both revenue and earnings positively as Evertz provides leading solutions in these areas.
  
• The robust purchase order backlog, which was in excess of $269 million as of February 2025, indicates strong demand for future shipments and sales, providing a solid foundation for future revenue growth.
  
• Evertz's investment in research and development, focused on IP-defined networking and immersive video solutions such as 4K and 8K ultra-high-definition offerings, could lead to innovation-driven revenue growth and improved competitive positioning.
  
• Expansion of U.S. manufacturing capabilities to mitigate tariff impacts represents a strategic move that may influence future margins positively by reducing costs associated with tariffs and maintaining competitive pricing.

Evertz Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Evertz Technologies's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.1% today to 10.5% in 3 years time.
• Analysts expect earnings to reach CA$60.9 million (and earnings per share of CA$0.78) by about April 2028, up from CA$60.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.1x on those 2028 earnings, up from 13.4x today. This future PE is lower than the current PE for the CA Communications industry at 22.1x.
• Analysts expect the number of shares outstanding to decline by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.56%, as per the Simply Wall St company report.

Evertz Technologies Future Earnings Per Share Growth

Risks

• The international segment experienced a significant decline in revenue, dropping by 31% quarter-over-quarter for Q3 and nearly 30% over the nine months, indicating potential risks in maintaining and growing international sales, which could impact overall revenue.
  
• The slight decrease in gross margins from 58.9% to 57.8% year-over-year could suggest challenges in maintaining profitability, particularly if margins continue to be impacted by product mix or tariff costs.
  
• There is a substantial risk associated with tariffs and their potential impact, especially since Evertz's capacity to absorb or pass these costs on to customers remains uncertain, which could negatively influence net margins.
  
• The ongoing operational expansion in the U.S. to mitigate tariffs may lead to higher initial costs and could create operational redundancies, affecting short-term earnings and increasing capital expenditures by an estimated $2 to $5 million.
  
• The rise in research and development expenses as a percentage of revenue, up to 29.5% year-to-date, could lead to pressure on net margins if these investments do not translate into proportional future revenue growth.

Valuation

• The analysts have a consensus price target of CA$13.5 for Evertz Technologies 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 CA$576.8 million, earnings will come to CA$60.9 million, and it would be trading on a PE ratio of 20.1x, assuming you use a discount rate of 6.6%.
• Given the current share price of CA$10.64, the analyst price target of CA$13.5 is 21.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.