Modernization Momentum And Global Expansion Drive Revenue Growth Amidst Challenges

Key Takeaways

• Strong growth in modernization order intake and service markets signals robust revenue and profitability potential, especially in key regions like India and Brazil.
  
• Planned share buyback and operational improvements, including consistent EBIT margin enhancements, could boost earnings per share and net margins.
  
• Declining Chinese market conditions, foreign exchange impacts, and regional pricing pressures threaten Schindler's revenue growth and profitability amidst economic slowdowns and restructuring costs.

Catalysts

Engages in the production, installation, maintenance, and modernization of elevators, escalators, and moving walks worldwide.

• Schindler has been successful in growing its modernization order intake, achieving a 20% year-on-year increase in Q3 2024, which could positively impact future revenue growth.
  
• The company plans to initiate a share buyback program of CHF 100 million over the next two years, which is expected to enhance earnings per share (EPS) by reducing the number of shares outstanding.
  
• Schindler's consistent improvement in EBIT margins for the seventh consecutive quarter, along with operational improvements and SG&A efficiencies, could lead to increased net margins.
  
• The service and modernization markets, contributing over 60% of Schindler's revenues, are showing robustness and growth potential globally, particularly in India, Brazil, and the Middle East, likely helping to boost overall revenue.
  
• Schindler's strategy to address the modernization business and the productivity improvements across various regions could lead to enhanced profitability, positively impacting future earnings.

Schindler Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Schindler Holding's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.1% today to 9.0% in 3 years time.
• Analysts expect earnings to reach CHF 1.1 billion (and earnings per share of CHF 10.42) by about November 2027, up from CHF 923.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CHF 971 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.2x on those 2027 earnings, down from 29.3x today. This future PE is greater than the current PE for the GB Machinery industry at 25.3x.
• Analysts expect the number of shares outstanding to decline by 0.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.43%, as per the Simply Wall St company report.

Schindler Holding Future Earnings Per Share Growth

Risks

• The declining market conditions in China, a significant player in Schindler's business, are posing challenges, with a mid-teens contraction expected in the E&E (Elevator & Escalator) units sold, potentially impacting revenue growth.
  
• Foreign exchange fluctuations have significantly affected Schindler's financial results, causing a more than CHF 300 million impact year-to-date, which could continue to affect revenues and profitability.
  
• The slowdown in construction and new projects in key markets, such as Germany and potentially others due to economic factors, may result in slower revenue realization and backlog conversion.
  
• The pricing pressure in the Chinese modernization and new installation markets, driven by agent and distributor challenges, is likely to affect net margins negatively in that region.
  
• Higher expected restructuring charges going into Q4 2024 and potentially beyond may weigh on profitability, limiting improvements in operating margins.

Valuation

• The analysts have a consensus price target of CHF 258.54 for Schindler Holding 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 CHF 285.0, and the most bearish reporting a price target of just CHF 229.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CHF 12.3 billion, earnings will come to CHF 1.1 billion, and it would be trading on a PE ratio of 28.2x, assuming you use a discount rate of 4.4%.
  
• Given the current share price of CHF 251.5, the analyst's price target of CHF 258.54 is 2.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.