Medical Division's New Products And Operational Efficiency Will Drive Future Success

Key Takeaways

• Growth in the safety division and strategic investments are boosting gross margins and revenue, with strong expected performance in key regions.
  
• Operational consolidation and cost management strategies aim to improve net and operating margins, enhancing profitability and sustainability.
  
• Challenging conditions in China and compliance issues threaten revenue and profitability, with significant risks to future earnings and margins from reduced demand and increased costs.

Catalysts

Operates as a medical and safety technology company worldwide.

• Drägerwerk's safety division is experiencing growth due to targeted investments in the sales organization and new product launches, which could positively impact revenue and gross margins.
  
• The company expects a strong performance in Q4 2024 due to large orders, especially in North and South America and Germany, likely leading to higher net sales and improved revenues.
  
• Drägerwerk is consolidating operations in Germany by reducing the number of locations, which could improve efficiency and reduce functional expenses, impacting net margins positively.
  
• The ongoing R&D investments in the medical division aim to update their product portfolio, which, once realized, could lead to increased sales and higher profitability through improved margins.
  
• Drägerwerk's focus on improving profitability and cost management, such as reducing capacity in underutilized areas, aims to enhance operating margins and overall earnings sustainability.

Drägerwerk KGaA Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Drägerwerk KGaA's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.4% today to 3.0% in 3 years time.
• Analysts expect earnings to reach €109.9 million (and earnings per share of €6.27) by about February 2028, down from €113.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €143.3 million in earnings, and the most bearish expecting €89 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, up from 9.4x today. This future PE is lower than the current PE for the GB Medical Equipment industry at 27.9x.
• 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 5.52%, as per the Simply Wall St company report.

Drägerwerk KGaA Future Earnings Per Share Growth

Risks

• The challenging market environment in China has led to decreased demand for ventilators and negatively impacted the Medical division, posing a risk to future revenue and earnings, especially if the situation doesn't improve.
  
• The company's EBIT includes significant one-time effects from asset sales, which may not be sustainable or repeatable, suggesting potential risks for future EBIT margins and overall earnings.
  
• The FDA warning letter and the company's pending compliance issues could impact future product launches, potentially affecting revenue growth and profit margins if not resolved timely.
  
• Slower growth or contraction in the APAC region, due to factors like reduced ventilator demand and healthcare reforms in China, poses a risk to future revenue and earnings.
  
• Increased costs, such as higher expenses from inventory adjustments and production, along with softer capacity utilization in the Medical division, could lead to lower net margins and drag on profitability.

Valuation

• The analysts have a consensus price target of €62.6 for Drägerwerk KGaA 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 €86.0, and the most bearish reporting a price target of just €47.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €3.7 billion, earnings will come to €109.9 million, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 5.5%.
  
• Given the current share price of €57.1, the analyst price target of €62.6 is 8.8% higher. 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.