Acquisition Of KB Signaling Will Unlock High-Margin Opportunities In North America

Key Takeaways

• Ongoing strategic measures and acquisitions aim to boost profitability, margins, and growth in high-margin signaling technology and digital investments.
  
• Portfolio optimization and cost reduction initiatives are positioned to enhance operating margins and long-term profitability.
  
• Economic challenges, geopolitical tensions, and weak markets in key regions pose risks to revenue stability and profitability, with restructuring efforts adding potential short-term costs.

Catalysts

Engages in the development, production, marketing, and servicing of braking and other systems for rail and commercial vehicles worldwide.

• The Rail division's record levels for revenues and order book, coupled with an increasing share of revenue from Rail, lay a foundation for profitable growth and can positively impact future revenue and profitability.
  
• The ongoing Boost 2026 strategy, which involves over 1,000 global measures, including cost reductions, product portfolio streamlining, and investments in digitalization and automation, is expected to improve profitability and margins.
  
• The acquisition of KB signaling from Alstom in September 2024 unlocks opportunities for Knorr-Bremse in the high-margin signaling technology business in North America, potentially boosting revenue and margins.
  
• Portfolio optimization measures with a total revenue volume of €1.4 billion, including the sale of non-core business units, are expected to increase operating EBIT margin by 130 basis points for 2026 versus 2022, enhancing margins.
  
• The focus on expanding global shared services, strengthening sites with low-cost levels, and other optimization measures aim to improve Knorr-Bremse’s profitability beyond 2026, impacting future net margins positively.

Knorr-Bremse Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Knorr-Bremse's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.6% today to 9.5% in 3 years time.
• Analysts expect earnings to reach €859.7 million (and earnings per share of €5.34) by about March 2028, up from €445.5 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 17.1x on those 2028 earnings, down from 31.7x today. This future PE is greater than the current PE for the DE Machinery industry at 16.6x.
• Analysts expect the number of shares outstanding to decline by 1.69% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.54%, as per the Simply Wall St company report.

Knorr-Bremse Future Earnings Per Share Growth

Risks

• Economic challenges and geopolitical tensions, such as the war in Ukraine, continue to impact the business environment, potentially affecting future revenues and profits.
  
• The Truck division faces a weak market environment with expected challenges in North America, Europe, and China, which could impact revenue and EBIT margins.
  
• Restructuring efforts and strategic changes, like footprint optimization and cost reduction, entail risks that could temporarily affect profitability or incur significant upfront costs.
  
• High reliance on certain regions, particularly Europe and North America, exposes Knorr-Bremse to market volatility and demand fluctuations, impacting revenue stability.
  
• Potential tariff impacts from geopolitical uncertainties could disrupt supply chains and increase costs, affecting net margins and overall financial performance.

Valuation

• The analysts have a consensus price target of €81.8 for Knorr-Bremse 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 €100.0, and the most bearish reporting a price target of just €60.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €9.0 billion, earnings will come to €859.7 million, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 5.5%.
  
• Given the current share price of €87.7, the analyst price target of €81.8 is 7.2% lower. 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.