Growth In Industrial Powerise Segment Will Improve Margins And Revenue Stability

Key Takeaways

• Stabilus' strategic shift towards industrial segments, enhanced by automation tech and the DESTACO acquisition, aims to stabilize earnings and improve margins.
  
• Improving supply chain efficiency and resolving working capital issues positively impacts free cash flow, while reduced CapEx strengthens financial health.
  
• Acquisitions drive revenue amid challenges in organic growth, with reliance on automotive posing risks from demand shifts and supply chain instability impacting 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 expanded Stabilus' portfolio in automation technology, improving revenue stability and potentially increasing margins due to enhanced efficiency and product diversification. This integration is expected to yield significant sales synergies and cost benefits.
  
• Stabilus anticipates growth in its Industrial Powerise segment, leveraging automation technology, healthcare, and construction sectors, which could lead to increased revenue and improved profit margins due to the high-value nature of these products.
  
• Stabilus is actively enhancing its supply chain efficiency by addressing temporary working capital issues, such as inventory surpluses, which impacts free cash flow and net leverage ratio positively as these issues are resolved throughout the year.
  
• Stabilus is shifting its focus from automotive to industrial segments, deliberately increasing industrial business revenue share. This strategy aims to enhance overall margins and stabilize earnings, mitigating automotive sector volatility.
  
• Continuous investment in automation technologies is expected to lower future CapEx requirements, which will further strengthen the company's financials by improving free cash flow and potentially increasing EBIT margins over time.

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 March 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 13.9x on those 2028 earnings, up from 11.3x today. This future PE is lower than the current PE for the GB Machinery industry at 17.7x.
• 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 7.39%, as per the Simply Wall St company report.

Stabilus Future Earnings Per Share Growth

Risks

• The acquisition and integration of DESTACO contributed significantly to revenue growth, suggesting that organic growth remains a challenge, particularly in the automotive sector, which could impact future revenue and earnings if acquisitions do not sustain this growth.
  
• There remains a heavy reliance on the Automotive sector, which experienced organic decline driven by softer demand for Powerise systems and uncertainty in electromobility, potentially affecting net margins and revenue stability.
  
• Fluctuations due to industrial actions and inventory build-ups threaten supply chain stability, as seen in the North American region, impacting working capital and potentially affecting earnings if further labor disputes occur.
  
• Competitive pressure in the Asian market and price deterioration in the automotive sector highlight risks of margin erosion, notably in APAC, which could lead to reduced net margins if not effectively managed.
  
• Temporary increase in net working capital and inventory levels due to strategic stockpiling may constrain free cash flow if not offset by expected reversals, impacting liquidity and financial flexibility.

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 13.9x, assuming you use a discount rate of 7.4%.
• Given the current share price of €33.05, the analyst price target of €51.86 is 36.3% 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.