High Energy Prices Will Shrink Margins For Stone Wool

Key Takeaways

• Growing regulatory, cost, and competitive pressures on traditional manufacturing threaten Rockwool's margins, profitability, and long-term market position.
  
• Shifts toward alternative materials and stagnant construction activity undermine future revenue growth and challenge the viability of further expansion.
  
• Expansion in key regions, regulatory tailwinds, product innovation, and market consolidation position Rockwool for sustained growth, improved margins, and increased market share.

Catalysts

Produces and sells stone wool insulation products in Western Europe, Eastern Europe, Russia, North America, Asia, and internationally.

• Intensifying regulatory and consumer pressure to move away from carbon-intensive, high-temperature manufacturing processes is likely to increase Rockwool's energy costs and could force expensive transitions to greener technologies, placing persistent downward pressure on net margins and profitability over the coming years.
  
• The accelerating shift towards alternative, bio-based or low-carbon insulation materials threatens Rockwool's long-term market share and pricing power, as more sustainable solutions are adopted across key geographies and the risk of demand erosion for traditional stone wool products rises, ultimately impacting revenues.
  
• Rising input costs-especially energy and foundry coke, which remain only partially hedged-present high vulnerability to commodity and utility price volatility. This creates structural risks to gross margin stability and may require ongoing, significant capital expenditures to maintain competitiveness.
  
• Demographic headwinds such as stagnating construction activities in developed markets, combined with hesitancy among major contractors and customers to commit to new projects due to macroeconomic and political uncertainty, limit revenue growth prospects and make ambitious capacity expansion projects harder to justify economically.
  
• Mounting competition from innovative and disruptive insulation technologies, including advanced plastics, aerogels and plant-based materials, is likely to drive industry price wars and compress operating margins across the sector, directly challenging Rockwool's ability to sustain elevated earnings and return on invested capital.

Rockwool Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Rockwool compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Rockwool's revenue will grow by 3.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 14.1% today to 11.2% in 3 years time.
• The bearish analysts expect earnings to reach €477.7 million (and earnings per share of €0.26) by about August 2028, down from €550.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 17.4x on those 2028 earnings, up from 14.9x today. This future PE is greater than the current PE for the GB Building industry at 14.2x.
• Analysts expect the number of shares outstanding to decline by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.02%, as per the Simply Wall St company report.

Rockwool Future Earnings Per Share Growth

Risks

• Rockwool is achieving significant market share gains in North America, driven by very low initial market penetration, robust customer pipeline, and increasing demand for its fire safety-focused stone wool insulation, which could drive long-term revenue and earnings growth as they scale in this large market.
  
• The company continues to invest aggressively in expanding production capacity across key regions (India, Romania, and major US projects), which supports the potential for future volume growth and operational leverage, leading to improved net margins and higher earnings as fixed costs are spread over increased output.
  
• Strengthening regulations and funding for fire safety and building energy performance in Europe, as well as Rockwool's active engagement with policymakers, position its core stone wool offerings as beneficiaries of these secular shifts, creating sustained tailwinds for revenue growth and enabling stable or expanding profit margins.
  
• Ongoing product portfolio innovation and successful integration of recent acquisitions-such as converting new business units to stone wool-based systems-are increasing Rockwool's competitiveness and customer appeal, which may allow improved pricing power and gross margin resilience over the long term.
  
• Industry consolidation and increased barriers for smaller competitors (due to necessary technology upgrades and electrification of production) favor Rockwool's scale and capital strength, possibly leading to increased market share and allowing for sustained or improving earnings and margin performance.

Valuation

• The assumed bearish price target for Rockwool is DKK249.91, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Rockwool's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of DKK360.1, and the most bearish reporting a price target of just DKK249.91.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €4.3 billion, earnings will come to €477.7 million, and it would be trading on a PE ratio of 17.4x, assuming you use a discount rate of 6.0%.
• Given the current share price of DKK292.65, the bearish analyst price target of DKK249.91 is 17.1% lower.
• 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.