Acquisitions Of Deimos And TESS Defence Propel Growth In Space And Defense Markets

Key Takeaways

• Acquisitions in space and defense sectors enhance capabilities and position Indra for increased profitability and revenue growth.
  
• Strategic regional expansions and efficiency initiatives could boost global market leadership and improve margins.
  
• Potential regulations, currency risks, and integration costs pose challenges to Indra's profitability, while slow growth in telecom and moderate wage inflation pressure overall earnings.

Catalysts

Operates as a technology and consulting company for aerospace, defense, and mobility business worldwide.

• Indra's acquisition of Deimos, specializing in satellite design and integration, could enhance their capabilities in the space sector, potentially driving future revenue growth from European space programs.
  
• The acquisition of TESS Defence positions Indra as a leader in the Spanish land vehicle defense market, which has a high growth potential with significant upcoming programs, likely contributing to increased defense revenues and profitability.
  
• Expansion in Air Traffic Management to North America and APAC, with contracts in Vietnam and expected deals in the USA, indicates potential for significant revenue growth as Indra strengthens its global leadership in this sector.
  
• Minsait's focus on implementing efficiency initiatives, such as GenAI for margin improvement, could lead to better net margins and profitability as the company streamlines its operations and focuses on high-value offerings.
  
• The strategic international expansion plan in the Middle East, North America, and Latin America, supported by a focus on key regions and acquisitions, is likely to drive revenue growth by broadening Indra's market presence and client base globally.

Indra Sistemas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Indra Sistemas's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.1% today to 6.5% in 3 years time.
• Analysts expect earnings to reach €357.0 million (and earnings per share of €1.97) by about January 2028, up from €244.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €316 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.3x on those 2028 earnings, up from 12.3x today. This future PE is lower than the current PE for the GB IT industry at 46.7x.
• Analysts expect the number of shares outstanding to grow by 0.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.42%, as per the Simply Wall St company report.

Indra Sistemas Future Earnings Per Share Growth

Risks

• The potential regulations and geopolitical factors impacting the defense and aerospace sectors could lead to fluctuations and uncertainties in revenue and profitability for Indra's defense and space operations.
  
• Foreign exchange risks due to currency depreciation in countries such as Argentina, Brazil, and Mexico could negatively impact Indra's earnings when converted back to euros.
  
• The integration costs and potential operational challenges associated with recent acquisitions like Deimos and TESS Defence might affect net margins in the short term if synergies are not realized as anticipated.
  
• A slow growth rate in certain sectors, such as Minsait's Telecom & Media division, which experienced a decline, could hinder overall revenue growth and pressure earnings.
  
• Wage inflation, even if moderate, combined with efforts to improve margins, might constrain net margin growth if cost efficiencies do not keep pace with salary increases.

Valuation

• The analysts have a consensus price target of €23.09 for Indra Sistemas 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 €29.0, and the most bearish reporting a price target of just €15.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €5.5 billion, earnings will come to €357.0 million, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 9.4%.
• Given the current share price of €17.08, the analyst's price target of €23.09 is 26.0% 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.