Expanding Modernization And Remote Servicing Will Drive Future Success

Key Takeaways

• KONE's growth in Services and Modernization, with higher-margin segments, could boost net margins and earnings positively.
  
• Strategic expansion in emerging markets and sustainability initiatives could drive long-term revenue growth and enhance competitive positioning.
  
• Challenges in the Chinese and North American markets, combined with exchange rate dependencies and margin pressures, threaten KONE's revenue and profitability growth.

Catalysts

Engages in the elevator and escalator business worldwide.

• KONE's business saw strong growth in Services and Modernization, with double-digit growth outside China and nearly 20% growth in Modernization orders. This business mix shift favoring higher-margin segments is likely to positively impact net margins and earnings.
  
• KONE is focusing on expanding its remote servicing offerings and connecting 36% of its service base, which could increase operational efficiency and potentially lower costs, positively impacting net margins.
  
• The introduction of new products like the MonoSpace 100 DX for low-rise markets and scaling up Modernization packages with A-class energy efficiency ratings suggest potential for revenue growth in untapped markets.
  
• Steady progress in sustainability initiatives, such as increasing sales of regenerative drives, aligns with global sustainability trends and could drive long-term revenue growth by attracting environmentally-conscious customers.
  
• KONE's strategic focus on emerging markets like the Middle East through leadership presence suggests potential for future revenue growth and an improved competitive position in these regions.

KONE Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KONE Oyj's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.6% today to 10.7% in 3 years time.
• Analysts expect earnings to reach €1.4 billion (and earnings per share of €2.62) by about May 2028, up from €951.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.6x on those 2028 earnings, down from 29.7x today. This future PE is greater than the current PE for the GB Machinery industry at 17.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.38%, as per the Simply Wall St company report.

KONE Oyj Future Earnings Per Share Growth

Risks

• Challenges in the Chinese market, particularly the decline in New Building Solutions orders, could negatively impact KONE's revenue and market share if the anticipated recovery does not materialize as expected.
  
• The uncertainty and potential decline in the North American market, especially due to tariff impacts and increased competition, could affect KONE's revenue growth and margin stability in this region.
  
• Although KONE has shown strong performance in Service and Modernization, potential fluctuations or slower-than-anticipated growth in these sectors could impact the company's overall revenue and profitability growth.
  
• Dependence on favorable currency exchange rates could pose a risk, as a predicted negative impact of €50 million on EBIT due to foreign exchange fluctuations could affect earnings if rates remain unfavorable.
  
• Margin pressures in China and competitive pricing challenges could continue to impact KONE's profitability if the company is unable to maintain or improve margins in this significant market.

Valuation

• The analysts have a consensus price target of €53.4 for KONE Oyj 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 €65.0, and the most bearish reporting a price target of just €37.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €12.7 billion, earnings will come to €1.4 billion, and it would be trading on a PE ratio of 24.6x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of €54.5, the analyst price target of €53.4 is 2.1% lower. 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.