DESTACO Acquisition And Automation Focus Expected To Improve Future Performance

Key Takeaways

• Strategic acquisitions and industrial focus are boosting Stabilus's revenue, margins, and future earnings potential.
  
• Supply chain optimization and aftermarket expansion aim to enhance cash flow and shareholder value.
  
• Declines in organic growth and automotive challenges, combined with pricing pressures and internal productions by competitors, could strain Stabilus' revenue and margins.

Catalysts

Manufactures and sells gas springs, dampers, electromechanical damper opening systems, vibration isolation products, and industrial components in Europe, the Middle East, Africa, North and South America, the Asia-Pacific, and internationally.

• The acquisition of DESTACO has led to a significant revenue increase and improved EBIT margin, highlighting its strategic importance in enhancing Stabilus's portfolio, particularly in automation technology, which is expected to stabilize and further improve future earnings.
  
• Stabilus's strategy to shift focus from the automotive sector to industrial business emphasizes higher-margin segments and cross-selling opportunities, which is anticipated to positively impact revenue and profit margins over time.
  
• Integration cost synergies with DESTACO are on track to achieve additional cost savings, contributing to improved net margins and enhanced financial performance in future quarters.
  
• The ongoing expansion in the Independent Aftermarket, with new product introductions such as Powerise systems, is expected to drive revenue growth and strengthen earnings due to high-margin aftermarket sales.
  
• Stabilus's efforts to optimize its supply chain and reduce net working capital, alongside a focus on operational efficiencies, are geared towards enhancing free cash flow, which will aid debt reduction and improve shareholder value over the long term.

Stabilus Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Stabilus's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.5% today to 7.2% in 3 years time.
• Analysts expect earnings to reach €110.5 million (and earnings per share of €4.12) by about February 2028, up from €72.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €96.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.0x on those 2028 earnings, up from 10.2x today. This future PE is lower than the current PE for the GB Machinery industry at 16.5x.
• Analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.56%, as per the Simply Wall St company report.

Stabilus Future Earnings Per Share Growth

Risks

• The decline in organic growth in key segments like automotive, combined with challenges in regions such as Asia Pacific, may continue to put pressure on revenue and margins.
  
• The market for automotive components, particularly Powerise, is facing headwinds due to shifts towards lower-segment car productions and uncertainty in electromobility, potentially impacting future earnings growth.
  
• Price erosion pressures, especially significant in the Asia Pacific region, could impact the EBIT margins and profitability as Stabilus navigates competitive pricing dynamics.
  
• Elevated net leverage ratios and inventory levels resulting from proactive supply chain measures may strain free cash flow and overall financial flexibility.
  
• The internal production decisions by key players (e.g., BYD manufacturing components in-house) could limit Stabilus’ revenue opportunities in the growing electromobility market.

Valuation

• The analysts have a consensus price target of €51.857 for Stabilus 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 €58.0, and the most bearish reporting a price target of just €42.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €1.5 billion, earnings will come to €110.5 million, and it would be trading on a PE ratio of 14.0x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of €30.0, the analyst price target of €51.86 is 42.1% 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.