US Toll Roads And Airport Growth Propel Revenue Amid Construction And Market Challenges

Key Takeaways

• Strong U.S. Toll Roads results and airport passenger growth suggest future revenue increases with infrastructure enhancements in progress.
  
• Expanding construction backlog and continued share buybacks indicate solid future revenue streams and potential for EPS growth.
  
• Adverse weather and construction issues, along with geographic and market competition, threaten Ferrovial's revenue growth, cash flow stability, and profit margins.

Catalysts

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

• Strong revenue and EBITDA growth in U.S. Toll Roads, especially in the 407, indicating potential future revenue increases as mobility and commuting trends continue.
  
• Upcoming capacity improvements and construction projects in managed lanes such as NTE and LBJ, suggesting potential for revenue and earnings growth once complete and any related disruptions are resolved.
  
• Record-breaking passenger numbers and growth in airports like Heathrow, AGS, and Dalaman, which are expected to boost revenue and potentially improve net margins as demand grows and as new infrastructure, like Terminal 1, comes online.
  
• An expanding construction order book and healthy backlog, which indicate future construction revenue streams and potential improvement in margins with efficient project selection and execution.
  
• Continued share buybacks and shareholder distributions, which could enhance earnings per share (EPS) by reducing the share count, alongside potential to influence investor sentiment positively.

Ferrovial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ferrovial's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.3% today to 8.1% in 3 years time.
• Analysts expect earnings to reach €796.7 million (and earnings per share of €1.16) by about November 2027, up from €736.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €950 million in earnings, and the most bearish expecting €532 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 42.0x on those 2027 earnings, up from 35.5x today. This future PE is greater than the current PE for the GB Construction industry at 33.2x.
• Analysts expect the number of shares outstanding to decline by 1.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.02%, as per the Simply Wall St company report.

Ferrovial Future Earnings Per Share Growth

Risks

• Construction works and adverse weather conditions, such as hurricanes, have negatively impacted traffic on major projects like the I-77 and I-66, which could lead to reduced revenue growth from these assets.
  
• Increased competition for express lanes projects in the U.S. may lead to higher acquisition costs, impacting profit margins and earnings potential.
  
• The company's reliance on dividend income from infrastructure assets, subject to external factors like weather and construction delays, introduces volatility to cash flow and net margins.
  
• Market dynamics, like potential toll road developments in areas already serviced by Ferrovial, pose a risk of traffic diversion and revenue loss.
  
• Ferrovial's strategy of rotating European assets and focusing more on North America might lead to geographical concentration risks, affecting revenue stability.

Valuation

• The analysts have a consensus price target of €39.86 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 €45.0, and the most bearish reporting a price target of just €28.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €9.8 billion, earnings will come to €796.7 million, and it would be trading on a PE ratio of 42.0x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of €35.9, the analyst's price target of €39.86 is 9.9% 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.