Transition To Fabless Model After Sale To Littelfuse Will Lead To Operational Efficiencies

Key Takeaways

• Strategic initiatives in China and a focus on localizing production could boost both revenue and market share in a key electric vehicle market.
  
• Transitioning to a fabless model and efficiency programs could enhance net margins and increase free cash flow through reduced operational costs.
  
• Economic challenges in Europe, geopolitical uncertainties, and slower e-mobility adoption could hinder Elmos Semiconductor's revenue growth and profitability.

Catalysts

Develops, manufactures, and distributes microelectronic components and system parts, and technological devices for automotive industry in Germany, other European Union countries, the Americas, Asia/Pacific, and internationally.

• Elmos is well-positioned to benefit from an increase in semiconductor content per vehicle, driven by trends in electrification, ADAS, and software-defined vehicles, likely boosting future revenue.
  
• The company has a strong market presence in China, a leading EV market, and plans to increase localization through a local-for-local China strategy, which could enhance revenues and market share.
  
• New design wins and ongoing projects in 2024, along with a promising pipeline for future projects, indicate potential for revenue growth as these projects ramp up in 2025 and beyond.
  
• Elmos's recent transition to a fabless model, after selling its fab to Littelfuse, could lead to improved net margins through reduced CapEx and operational efficiencies.
  
• Efforts to enhance operational efficiency and cash flow through initiatives like the OEE program, and potential for working capital improvements, could impact net margins and generate higher free cash flow.

Elmos Semiconductor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Elmos Semiconductor's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 17.2% today to 16.3% in 3 years time.
• Analysts expect earnings to reach €111.1 million (and earnings per share of €6.59) by about March 2028, up from €102.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €123.8 million in earnings, and the most bearish expecting €99.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.7x on those 2028 earnings, up from 11.7x today. This future PE is greater than the current PE for the GB Semiconductor industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 0.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.07%, as per the Simply Wall St company report.

Elmos Semiconductor Future Earnings Per Share Growth

Risks

• Weak GDP growth and a shrinking economy in Europe, particularly in Germany, could potentially limit revenue growth and market demand for Elmos Semiconductor's products.
  
• The ongoing inventory adjustments and destocking effects, which are taking longer than expected, could negatively impact revenue and short-term earnings growth.
  
• Geopolitical uncertainties and potential new tariffs, especially concerning trade relations with the U.S., could affect revenue and net margins, particularly in the European and Asian markets.
  
• Slower-than-expected progress in e-mobility adoption, particularly in Europe, could dampen revenue growth from electric vehicle-related products, despite Elmos being well-positioned in this sector.
  
• Price declines and cautious management of gross margins indicate potential pressure on net earnings, reflecting competitive pricing and cost challenges in maintaining profitability.

Valuation

• The analysts have a consensus price target of €88.833 for Elmos Semiconductor 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 €110.0, and the most bearish reporting a price target of just €70.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €680.7 million, earnings will come to €111.1 million, and it would be trading on a PE ratio of 16.7x, assuming you use a discount rate of 7.1%.
• Given the current share price of €69.7, the analyst price target of €88.83 is 21.5% 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.