Rising Operational Expenses May Pressure Margins, Yet Software-Driven Solutions Could Boost Future Profits

Key Takeaways

• Increased investment in operations and marketing may strain margins if they don't yield proportional revenue growth, impacting net margins negatively.
  
• Reliance on large deals and transformation projects may expose SNP to risks of project delays or cancellations, affecting revenue predictability.
  
• SNP's strong revenue growth, operational efficiency, and strategic expansion into software-driven solutions indicate confidence and potential for enhanced margins and earnings.

Catalysts

Engages in the provision of software solutions for the management of digital transformation processes.

• SNP's continued investment in operational excellence and marketing may increase costs and strain margins, especially if these efforts don't translate directly into proportional revenue growth. This could impact net margins negatively if expenses grow faster than revenue.
  
• The strong revenue growth reported might be unsustainable in the long-term if the current macroeconomic environment deteriorates or if SNP fails to maintain the same level of order entry growth, potentially impacting future revenue projections.
  
• Although SNP has displayed strong EBIT growth, increased personnel expenses, including bonus accruals due to overperformance, could elevate operational costs in the future, compressing net earnings if revenue growth does not keep pace.
  
• Reliance on large deals and focusing heavily on transformation projects in conjunction with other firms could expose SNP to risks of project delays or cancellations, which might affect future earnings and revenue predictability.
  
• The push for software segment growth, while promising, might not yield expected profitability if integration with third-party software does not result in significant additional revenue streams or if margin expectations are not met.

SNP Schneider-Neureither & Partner Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SNP Schneider-Neureither & Partner's revenue will grow by 9.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.0% today to 6.2% in 3 years time.
• Analysts expect earnings to reach €19.2 million (and earnings per share of €2.58) by about March 2028, up from €14.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.5x on those 2028 earnings, down from 35.1x today. This future PE is greater than the current PE for the GB IT industry at 19.5x.
• 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 6.48%, as per the Simply Wall St company report.

SNP Schneider-Neureither & Partner Future Earnings Per Share Growth

Risks

• SNP has demonstrated significant revenue growth with both order entry and revenue increasing by over 20%, indicating a strong sales pipeline and customer demand. This could suggest continued revenue growth in the future.
  
• The company has achieved its best-ever Q3 performance in terms of EBIT and operating cash flow, suggesting strong operational efficiency and profitability improvements that may enhance net margins.
  
• SNP has raised its financial guidance for 2024, a sign of confidence in its business model and anticipated future growth, which could lead to higher-than-expected earnings.
  
• Expansion in key IT markets, such as doubling business in the U.K. and substantial growth in North America, demonstrates SNP's successful geographic diversification, potentially leading to increased revenue streams.
  
• The strategic focus on software-driven solutions with increasing software proportion in projects suggests a shift towards higher-margin business areas, which may contribute to improved profit margins.

Valuation

• The analysts have a consensus price target of €58.0 for SNP Schneider-Neureither & Partner 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 €63.0, and the most bearish reporting a price target of just €50.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €309.4 million, earnings will come to €19.2 million, and it would be trading on a PE ratio of 25.5x, assuming you use a discount rate of 6.5%.
• Given the current share price of €68.8, the analyst price target of €58.0 is 18.6% 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.