Renewable Energy Focus Will Support Future Success Amid Global Energy Transition

Key Takeaways

• Strong order growth and strategic focus on renewables position Wärtsilä for increased revenues as global energy transition advances.
  
• Divestments and operational improvements enhance profitability, while strategic R&D investments drive efficiency and competitive technology development.
  
• Geopolitical risks and uncertain energy storage review may impact future revenues and investor confidence, with tariff risks and project mix changes affecting margins.

Catalysts

Offers technologies and lifecycle solutions for the marine and energy markets worldwide.

• Wärtsilä's strong order intake growth, particularly in equipment (up 51%), suggests potential for increased future revenues, supporting the company's long-term growth trajectory as demand for their solutions rises.
  
• The company's focus on renewable energy solutions, including their energy storage business and growth in wind and solar installations, indicates potential for increased revenues and profitability as the global energy transition continues.
  
• The divestment of ANCS to focus on core business areas could enhance profitability by streamlining operations, improving net margins, and concentrating resources on higher-margin offerings.
  
• Continuous improvements in operating results, moving from 6.7% to 11.1%, combined with strategic investments in R&D and innovation, are poised to drive earnings growth by enhancing operational efficiency and development of competitive technologies.
  
• Positive market sentiments in marine and energy, driven by increased demand for alternative-fuel-capable vessels and data center power solutions, suggest potential revenue expansion and increased service volumes leading to profit margins improvement.

Wärtsilä Oyj Abp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Wärtsilä Oyj Abp's revenue will grow by 9.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.8% today to 8.6% in 3 years time.
• Analysts expect earnings to reach €722.3 million (and earnings per share of €1.19) by about March 2028, up from €503.0 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 18.3x on those 2028 earnings, down from 22.1x today. This future PE is lower than the current PE for the GB Machinery industry at 21.8x.
• 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 6.57%, as per the Simply Wall St company report.

Wärtsilä Oyj Abp Future Earnings Per Share Growth

Risks

• The geopolitical environment poses elevated risks, which could delay decision-making in energy-related projects, potentially impacting future revenue and earnings.
  
• The ongoing strategic review of the energy storage business creates uncertainty regarding future profitability and financial targets, which could impact investor confidence and earnings.
  
• There is potential risk from fluctuations in working capital management, which is currently at an unsustainable low level, possibly affecting net margins if previous levels resurface.
  
• The reliance on export from Europe to the U.S. for energy products exposes Wärtsilä to tariff risks, specifically in the event of changes in trade policies, which could impact future revenues and earnings.
  
• Changes in project mix within Marine Equipment services could negatively affect net margins, as less favorable project mixes tend to yield lower profitability.

Valuation

• The analysts have a consensus price target of €18.512 for Wärtsilä Oyj Abp 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 €23.0, 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 €8.4 billion, earnings will come to €722.3 million, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 6.6%.
• Given the current share price of €18.83, the analyst price target of €18.51 is 1.7% 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.