Robust Cost Strategy And Strong Minerals Orders Will Drive Future Success

Key Takeaways

• Metso's strategic cost management and safety focus could enhance margins, cash flow, and working capital efficiency amidst slower industry cycles.
  
• Strong orders from copper and gold sectors and sustainability initiatives may drive future growth, with new strategies unfolding at the Capital Markets Day.
  
• Declining sales and ongoing cost challenges in key segments, alongside sustainability-related risks, could hinder revenue growth and profitability.

Catalysts

Provides technologies, end-to-end solutions, and services for aggregates, minerals processing, and metals refining industries in Europe, North and Central America, South America, the Asia Pacific, Greater China, Africa, the Middle East, and India.

• Metso has implemented a robust cost management strategy, enabling them to maintain healthy margins in both the Aggregates and Minerals segments despite slower cycles, potentially improving net margins going forward.
  
• The company has witnessed strong orders driven by the copper and gold sectors, indicating potential future revenue growth in the Minerals segment as these projects progress over the coming quarters.
  
• The sustainability initiative, Metso Plus, aims to grow faster than overall sales, potentially driving up revenue as sustainability-focused projects become increasingly important for customers.
  
• Management's strategic focus on safety performance, normalizing inventory levels, and ongoing inventory reduction efforts could positively impact cash flows and working capital efficiency.
  
• Metso is executing a strategy process, to be discussed further in their upcoming Capital Markets Day, which may outline new growth opportunities and efficiency measures, potentially boosting earnings in the future.

Metso Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Metso Oyj's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.0% today to 12.1% in 3 years time.
• Analysts expect earnings to reach €709.2 million (and earnings per share of €0.84) by about March 2028, up from €485.0 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 16.9x on those 2028 earnings, down from 18.2x today. This future PE is lower than the current PE for the FI Machinery industry at 22.4x.
• 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 6.87%, as per the Simply Wall St company report.

Metso Oyj Future Earnings Per Share Growth

Risks

• Market conditions for mobile equipment in the Aggregates segment remain soft, and both equipment and services orders were down by 1%, which could impact sales and revenue stability.
  
• Sales in the Aggregates segment did not show growth and maintained the same level compared to the previous year, which could limit potential revenue growth.
  
• Despite a strong order intake in the Minerals segment, sales for equipment and services were down by 11% and 4% respectively, compared to the previous year, potentially affecting revenue and overall financial performance.
  
• Increased warranty and nonrecurring costs impacted the financials, notably a €19 million charge for capacity adjustments in the Minerals segment, which could affect net margins.
  
• The need for significant reductions in logistics CO2 emissions by 2025 poses a risk if not achieved, potentially leading to increased operational costs or penalties, impacting net margins and profitability.

Valuation

• The analysts have a consensus price target of €11.872 for Metso 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 €14.0, and the most bearish reporting a price target of just €8.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €5.9 billion, earnings will come to €709.2 million, and it would be trading on a PE ratio of 16.9x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of €10.68, the analyst price target of €11.87 is 10.1% 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.