Eastern Europe Expansion And Netstal Integration To Boost Profit Margins And Revenue Growth

Key Takeaways

• Strong growth in Eastern Europe and Central Asia, and secure capacity utilization, suggest potential revenue growth and stable profit margins.
  
• Expansion in service and successful integration of Netstal expected to boost recurring revenue and improve efficiency and profitability.
  
• Delays and uncertainties in customer decisions, competition, and geopolitical fluctuations impact Krones' revenue, margins, and growth projections.

Catalysts

Engages in the planning, development, and manufacture of machines and lines for the production, filling, and packaging technology in Germany and internationally.

• The development and growth in Eastern Europe and Central Asia are performing well, suggesting potential revenue growth from these regions. This strong market performance could contribute to increasing revenue.
  
• Capacity utilization is secured until the end of 2025, providing high planning security and potentially stabilizing or increasing profit margins through better fixed cost absorption and economies of scale.
  
• The ongoing successful integration of Netstal is contributing positively to revenue, with a future potential increase in earnings as the business becomes fully synergized and efficiency is improved.
  
• Intralogistics is expected to have a strong fourth quarter, and a growing order backlog that supports future growth. This can improve the segment’s revenue and profitability as projects are executed.
  
• Focus on expanding the service and aftermarket business is likely to enhance recurring revenue streams and improve margins, as these services can be higher margin compared to new equipment sales.

Krones Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Krones's revenue will grow by 7.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 6.3% in 3 years time.
• Analysts expect earnings to reach €407.0 million (and earnings per share of €13.26) by about January 2028, up from €249.4 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €352.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.0x on those 2028 earnings, down from 16.4x today. This future PE is lower than the current PE for the GB Machinery industry at 16.6x.
• Analysts expect the number of shares outstanding to decline by 0.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.17%, as per the Simply Wall St company report.

Krones Future Earnings Per Share Growth

Risks

• Order intake growth has been impacted by delays and uncertainties in customer decision-making, which could lead to lower-than-expected future revenues.
  
• Krones faces significant price pressure from competitors, especially those based in China and Italy, potentially impacting net margins as they fight for market share.
  
• Fluctuations in key regions, such as North America, due to geopolitical events and the upcoming U.S. elections may create volatility in earnings and hitting top-line growth projections.
  
• The ongoing challenges in the Process Technology segment, with a history of slower growth and execution delays, could affect the overall revenue and profitability targets.
  
• Potential disruptions in the Intralogistics segment, with postponed customer projects possibly affecting cash flow and revenue timing, creating risk for the financial forecasts.

Valuation

• The analysts have a consensus price target of €151.7 for Krones 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 €170.0, and the most bearish reporting a price target of just €125.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €6.4 billion, earnings will come to €407.0 million, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 5.2%.
• Given the current share price of €129.8, the analyst's price target of €151.7 is 14.4% 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.