Acquisitions And Collaborations Will Expand Markets By 2030

Key Takeaways

• Strategic acquisitions and technological advancements position DEUTZ for revenue growth by entering profitable markets and catering to evolving demands.
  
• Cost-efficiency programs and market expansion into services and energy are expected to enhance margins and profitability.
  
• Significant declines in construction and agriculture sectors, along with high operational costs, are straining DEUTZ’s financial performance and creating uncertainties in revenue recovery.

Catalysts

Develops, manufactures, and sells diesel and gas engines in Europe, the Middle East, Africa, the Asia Pacific, and the Americas.

• The acquisition of Rolls-Royce Power Systems and the Daimler Truck engines segment is expected to expand DEUTZ's product offerings, particularly in medium and heavy-duty engines, potentially boosting revenue growth as new, more profitable markets are targeted.
  
• DEUTZ's Future Fit program aims to achieve sustainable savings of €50 million from 2026 onward, which should enhance net margins by improving cost efficiencies and competitive positioning.
  
• Expansion into high-margin service and energy businesses is underway, with an aim to achieve revenue of more than €500 million from energy business alone by 2030, anticipated to positively impact earnings and profitability.
  
• The TAFE collaboration in India will enable the production of low-priced engines from 2027, allowing DEUTZ to capture a share of the price-sensitive market sectors, driving revenue growth in emerging markets.
  
• DEUTZ plans to leverage its technological advancements, such as hydrogen engines and retrofitting large-scale applications, to address evolving market demands, which could enhance future revenue streams and support margin expansion.

DEUTZ Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DEUTZ's revenue will grow by 15.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.3% today to 5.6% in 3 years time.
• Analysts expect earnings to reach €155.5 million (and earnings per share of €1.14) by about April 2028, up from €42.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €180 million in earnings, and the most bearish expecting €130.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.2x on those 2028 earnings, down from 22.0x today. This future PE is lower than the current PE for the GB Machinery industry at 17.3x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.99%, as per the Simply Wall St company report.

DEUTZ Future Earnings Per Share Growth

Risks

• A decline in revenue of 12% was noted for the year, largely due to weak sales in Europe, particularly in the construction and agricultural sectors, impacting overall profit margins.
  
• EBIT margin decreased by 2.8 percentage points year-over-year, influenced by reduced production and sales, indicating challenges in sustaining profitability.
  
• The construction and agricultural machinery markets experienced significant declines of over 30%, which previously would have resulted in losses, highlighting ongoing sector vulnerabilities which could affect revenues.
  
• There is uncertainty in the market due to potential production bottlenecks and dependency on external economic policies, such as Germany's government spending programs, which may delay revenue recovery.
  
• High operational and restructuring costs, including €20 million to €30 million in severance payments, may strain near-term financial performance and impact net earnings before anticipated cost savings are realized in 2026.

Valuation

• The analysts have a consensus price target of €8.64 for DEUTZ 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 €10.9, and the most bearish reporting a price target of just €6.1.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €2.8 billion, earnings will come to €155.5 million, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 6.0%.
• Given the current share price of €6.65, the analyst price target of €8.64 is 23.0% 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.