Aggressive Expansion Into North American Toll Roads Will Strain Future Profit Margins

Key Takeaways

• Aggressive expansion in North America could affect future net margins due to delayed returns from significant capital expenditures and competitive challenges.
  
• Focus on sustainability and Indian infrastructure may pressure short-term profitability, impacting earnings despite strategic alignment with long-term goals.
  
• Strategic focus on North American infrastructure and solid financial health position Ferrovial for sustained growth and robust shareholder returns.

Catalysts

Engages in the design, construction, financing, operation, and maintenance of transport infrastructure and urban services internationally.

• Ferrovial's aggressive expansion into North American toll roads and airports, including a strategic focus on managed lanes and the new Terminal 1 at JFK, suggests significant capital expenditures that may not immediately result in proportional revenue growth, potentially affecting future net margins due to the timing of returns on these investments.
  
• The substantial investments in the North American Toll Road sector face uncertainties due to competitive bidding and economic shifts, which may strain the company’s ability to maintain its historical revenue growth rates and thus impact future earnings.
  
• The buyback program, although partially offset by investment in new projects, indicates a cautious approach towards returning capital directly through dividends, which might suppress EPS growth expectations by limiting share reduction benefits.
  
• Ferrovial's focus on sustainability and new energy infrastructure investments, such as solar projects, while strategically aligned with long-term goals, may initially put pressure on net margins due to required capital outlay and potential inefficiencies during initial operations.
  
• The ambitious growth strategy in the high-potential but still volatile Indian infrastructure market may not yield immediate revenue benefits, and the associated risks could affect near-term profitability and earnings projections.

Ferrovial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ferrovial's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 35.3% today to 8.0% in 3 years time.
• Analysts expect earnings to reach €829.5 million (and earnings per share of €1.15) by about May 2028, down from €3.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €1.1 billion in earnings, and the most bearish expecting €651 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 45.9x on those 2028 earnings, up from 9.6x today. This future PE is greater than the current PE for the GB Construction industry at 22.4x.
• Analysts expect the number of shares outstanding to decline by 0.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.16%, as per the Simply Wall St company report.

Ferrovial Future Earnings Per Share Growth

Risks

• Ferrovial's North American toll road assets and the 407 ETR have shown strong revenue growth and significant dividend distributions, suggesting potential for continued high revenue and earnings performance.
  
• The company's strategic focus on North America, including significant investments in toll roads and potential opportunities in airports and energy infrastructure, may drive sustained revenue growth and robust shareholder returns.
  
• Strong cash flow and a solid ex-infrastructure net debt position highlight Ferrovial's strong financial health, which could support future investments and maintain profitability.
  
• The upcoming completion of Terminal 1 at JFK and the anticipated strong performance of new projects in India and existing North American assets suggest potential for increased future revenue and EBITDA.
  
• Record construction order book and successful divestment strategy provide Ferrovial with a stable financial foundation and flexibility to capitalize on new opportunities, which could sustain or improve net margins.

Valuation

• The analysts have a consensus price target of €43.682 for Ferrovial 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 €49.0, and the most bearish reporting a price target of just €30.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €10.3 billion, earnings will come to €829.5 million, and it would be trading on a PE ratio of 45.9x, assuming you use a discount rate of 7.2%.
• Given the current share price of €42.88, the analyst price target of €43.68 is 1.8% 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.