Haynes Acquisition And 20% NAS Expansion Will Strengthen Future Market Position

Key Takeaways

• The acquisition of Haynes International and focus on core markets enhance Acerinox's market share and revenue potential in high-demand sectors and regions.
  
• Investments in sustainability and selling non-core assets strengthen the balance sheet, supporting strategic growth in profitable sectors and boosting future earnings.
  
• Labor disputes and intense competition, combined with market uncertainties, acquisition challenges, and potential European political delays, pose significant risks to Acerinox's future profitability.

Catalysts

Manufactures, process, and markets stainless steel products in Spain, the United States, Africa, Asia, Rest of Europe, and internationally.

• The acquisition of Haynes International is expected to transform Acerinox's capabilities and product offerings in high-performance alloys, likely boosting future revenues through market expansion and increased market share in high-demand sectors like aerospace and oil and gas.
  
• Acerinox's new production model at Acerinox Europa aims to improve productivity and profitability through higher added-value products and increased flexibility, potentially enhancing net margins over time as the business adapts to fluctuating market conditions.
  
• The strategic focus on core markets, like the expansion in North American Stainless (NAS) production capacity by 20%, is set to maintain and grow market share in the U.S. This could drive higher revenues and stable pricing, contributing positively to future earnings.
  
• The company is investing heavily in sustainability initiatives, such as the EcoACX product line, which may improve long-term revenue streams and margins as demand for low-emission, eco-friendly materials increases in line with global sustainability trends.
  
• The sale of non-core assets like Bahru Stainless has strengthened Acerinox's balance sheet, allowing them to focus financial resources and strategic efforts on more profitable core and high-growth sectors, anticipated to positively impact future earnings.

Acerinox Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Acerinox's revenue will grow by 10.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.2% today to 5.6% in 3 years time.
• Analysts expect earnings to reach €409.7 million (and earnings per share of €1.65) by about March 2028, up from €224.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €484.0 million in earnings, and the most bearish expecting €321.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, down from 12.6x today. This future PE is greater than the current PE for the GB Metals and Mining industry at 7.7x.
• Analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.74%, as per the Simply Wall St company report.

Acerinox Future Earnings Per Share Growth

Risks

• Unresolved uncertainties and potential delays in market reactions, such as those in the European market related to political events, could negatively impact Acerinox's future revenues.
  
• The five-month strike at Acerinox Europa and its significant impact on financial performance raises concerns about labor relations and operational stability, potentially compressing future net margins and earnings.
  
• The acquisition of Haynes International and the associated debt could strain financial resources and affect earnings if expected synergies and market conditions do not materialize as planned.
  
• Continued market contractions in the U.S. with PMI statistics low for consecutive years might suggest slower-than-anticipated recovery, affecting overall demand and revenue generation.
  
• Intense competition from imports affecting pricing, particularly in Europe, might continue to depress prices if protective measures like tariffs are not effectively implemented, impacting future net margins and profitability.

Valuation

• The analysts have a consensus price target of €13.72 for Acerinox 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 €15.5, and the most bearish reporting a price target of just €11.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €7.3 billion, earnings will come to €409.7 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 11.7%.
• Given the current share price of €11.41, the analyst price target of €13.72 is 16.8% 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.