US Air Traffic Modernization Will Transform Global Markets Despite Overvaluation

Key Takeaways

• Market optimism may be overestimating sustainable growth and margin gains amid project delays, regulatory uncertainties, and reliance on volatile government contracts.
  
• Competitive threats from larger integrated players and industry shifts toward open-source could compress future profitability despite strong order momentum and global expansion.
  
• Strong global demand, focus on recurring software revenues, technological innovation, and disciplined expansion position Frequentis for sustained growth, profitability, and sector leadership.

Catalysts

Develops and markets communication and information systems for safety-critical control centers in Europe, North America, Asia, Australia, South America, Middle East, Africa, and worldwide.

• The strong increase in order intake (>35%), record backlog (€764 million), and robust global demand-especially driven by infrastructure modernization initiatives in the U.S. (e.g., FAA's multibillion dollar air traffic management upgrade and military digitalization)-may be leading investors to overestimate the durability and trajectory of Frequentis's top-line growth, pushing valuation above sustainable near-term revenue potential.
  
• Rapid progress in software-driven air traffic management and recurring service contracts is supporting optimism for rising net margins and long-term earnings, but near-term margin expansion is likely constrained as major multi-year projects (like Release 10) still require heavy R&D investment and initial contract phases are low-margin, potentially leading to disappointment relative to elevated expectations.
  
• The accelerating global digital transformation in critical infrastructure and heightened cybersecurity requirements are sustaining the narrative of long-term premium pricing and margin expansion, yet the industry's trend toward larger, vertically integrated players and increasing preference for end-to-end or open-source solutions could erode competitive differentiation and compress future profitability.
  
• Strategic expansion and customer diversification (e.g., further penetration in North America, Middle East, and defense sectors) have caused investors to price in sustained international market share gains, but actual order conversion and deployment schedules remain highly dependent on regulatory approvals and government funding cycles, increasing the risk that revenue growth will be lumpier and not as predictable as currently implied by valuation.
  
• Ongoing reliance on government and defense contracts is being downplayed amidst optimism about diversification, yet political and budgetary uncertainty (especially in Europe and post-pandemic Asia) may lead to slower-than-expected adoption or delays/cancellations of critical contracts; this could heighten revenue volatility and expose Frequentis's earnings to downside not adequately reflected in the current share price.

Frequentis Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Frequentis's revenue will grow by 9.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.6% today to 5.6% in 3 years time.
• Analysts expect earnings to reach €34.8 million (and earnings per share of €2.62) by about August 2028, up from €22.0 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 22.9x on those 2028 earnings, down from 37.8x today. This future PE is lower than the current PE for the DE Aerospace & Defense industry at 97.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.04%, as per the Simply Wall St company report.

Frequentis Future Earnings Per Share Growth

Risks

• Consistently strong order intake growth (35.6% YoY to a record €309 million) and a robust orders on hand backlog (€764 million, up 23%), with over 50% of next year's revenues already "in-house," suggest high revenue visibility and long-term growth momentum, which contradicts expectations of a declining share price due to revenue instability.
  
• Frequentis continues to benefit from secular upgrades in global air traffic management, with specific mention of accelerating infrastructure modernization in the US (FAA's USD 12-13 billion investment program) and large-scale multiyear defense and public safety contracts worldwide, which are driven by long-term sectoral trends likely to support top-line growth and order flow.
  
• Ongoing shift toward higher value software and service contracts (currently 20% software, 10% hardware, with trend towards more complex, solution-oriented projects) enables a recurring-revenue profile and increasing net margin potential, especially as new tenders often require integrated IT offerings, supporting future profitability.
  
• Successful execution and international expansion, with revenue growing in every region except Asia, especially over 50% growth in the Americas and 16% growth in the Australia/Pacific/Africa region, indicate strong competitive positioning and secular tailwinds in global aviation, rail, defense, and public safety markets, underpinning sustainable earnings growth.
  
• Investment in new disruptive technologies (e.g., ATM Release 10 platform, drone identification/counter-UAS systems, digital towers), as well as a disciplined M&A strategy aimed at expanding its portfolio in safety critical solutions, provide Frequentis with additional long-term growth and margin expansion opportunities, increasing the likelihood of higher future revenues and earnings.

Valuation

• The analysts have a consensus price target of €51.302 for Frequentis 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 €70.0, and the most bearish reporting a price target of just €42.21.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €625.5 million, earnings will come to €34.8 million, and it would be trading on a PE ratio of 22.9x, assuming you use a discount rate of 6.0%.
  
• Given the current share price of €62.6, the analyst price target of €51.3 is 22.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.