EV Transition And Tariff Barriers Will Squeeze Margins

Key Takeaways

• The accelerating shift to electric vehicles and intensifying competition threaten NORMA Group's core business, squeezing margins and limiting growth in traditional markets.
  
• Rising regulatory, supply chain, and sustainability pressures could drive up costs and further erode long-term profitability and global competitiveness.
  
• Transformation efforts, operational efficiencies, and strategic divestments are strengthening profitability, cash flow, and positioning NORMA Group for long-term, resilient growth in industrial joining technology.

Catalysts

Manufactures and sells engineered joining technology solutions in Europe, the Middle East, Africa, the Americas, and the Asia-Pacific.

• The accelerating transition to electric vehicles, particularly in key global markets, poses a structural threat to NORMA Group's core automotive business, as EVs require fewer traditional fluid and connection systems, resulting in persistent long-term pressure on the company's revenue growth and limiting addressable market size.
  
• Rising global trade tensions and the shift toward localized supply chains have introduced new tariffs and barriers that are already compressing NORMA's margins in the automotive sector and threatening to erode international competitiveness, which will likely drive higher costs and muted international revenue growth in future years.
  
• Material cost ratio improvements achieved recently may prove unsustainable, as increased regulatory and consumer focus on sustainability is expected to drive up compliance costs and require costly product adaptations over time, putting long-term downward pressure on net margins and profitability.
  
• Structural over-dependence on the automotive sector leaves NORMA exposed to volume and margin pressures associated with the EV transition, while ongoing integration and restructuring risks from prior acquisitions continue to elevate operating costs and threaten sustained earnings recovery, especially as secular demand for traditional products wanes.
  
• The industry landscape is intensifying, with growing competition from low-cost producers and the risk that 3D printing and other disruptive manufacturing technologies will make NORMA's traditional joining solutions obsolete, likely resulting in further margin erosion and market share loss that will impact long-term earnings and profitability.

NORMA Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on NORMA Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming NORMA Group's revenue will grow by 1.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.2% today to 4.3% in 3 years time.
• The bearish analysts expect earnings to reach €50.9 million (and earnings per share of €1.59) by about August 2028, up from €2.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.0x on those 2028 earnings, down from 232.9x today. This future PE is lower than the current PE for the GB Machinery industry at 18.4x.
• 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 7.52%, as per the Simply Wall St company report.

NORMA Group Future Earnings Per Share Growth

Risks

• The company is implementing a comprehensive transformation program aimed at streamlining its global manufacturing footprint and administration, which is expected to result in significant operating expense savings and support a return to double-digit EBIT margins by 2028, potentially improving overall earnings and profitability.
  
• Ongoing improvements in materials cost ratio and sustained positive trade working capital, supported by the successful rollout of the company-wide ERP system, indicate existing operational efficiencies that could support margin expansion and cash flow stability in future quarters.
  
• NORMA's ability to pass on increased costs from tariffs and other external factors to customers, particularly in its Water Management and industrial businesses, suggests resilience in preserving gross margins and mitigating inflationary or tariff-related pressures on earnings.
  
• The sale of the Water Management business is described as a once-in-a-lifetime opportunity with high buyer interest and relatively limited exposure to geopolitical or tariff headwinds, which could crystallize substantial value and significantly strengthen NORMA's balance sheet.
  
• The company's demonstrated engineering capabilities and expansion into higher-margin, customized solutions-along with investments aimed at automation and production efficiency-position NORMA to capitalize on long-term trends in industrial joining technology, supporting both revenue growth and profitability as industry demand evolves.

Valuation

• The assumed bearish price target for NORMA Group is €7.9, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of NORMA Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €27.0, and the most bearish reporting a price target of just €7.9.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €1.2 billion, earnings will come to €50.9 million, and it would be trading on a PE ratio of 6.0x, assuming you use a discount rate of 7.5%.
• Given the current share price of €16.88, the bearish analyst price target of €7.9 is 113.7% 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.