Germany Production Centralization And Ferrochrome Focus Will Unlock Future Potential

Key Takeaways

• Centralizing production and cost-saving measures aim to improve profitability and enhance net margins by the targeted year.
  
• Growing demand for low-emission ferrochrome and possible U.S. tariff protections may boost revenue and market positioning.
  
• Geopolitical tensions, low-priced imports, and weak market conditions threaten revenue stability and future growth in Europe and America.

Catalysts

Produces and sells various stainless steel products in Finland, Germany, Italy, the United Kingdom, other European countries, North America, the Asia-Pacific, and internationally.

• Outokumpu is implementing structural changes, such as the centralization of advanced materials production in Germany, projected to deliver €50 million in annual cost savings. This could improve the company's profitability and net margins going forward.
  
• The company plans to achieve a €350 million EBITDA improvement target by the end of 2025 by executing commercial and cost-saving actions, which would positively impact earnings.
  
• There is a growing interest in Outokumpu's low-emission ferrochrome, especially given it's the only producer in the EU. This could spark revenue growth and improve market positioning amidst global supply chain considerations.
  
• Additional short-term cost-saving measures, such as procurement improvements and reduced discretionary spending worth €50 million, are expected to bolster the financial outcome for 2025, positively influencing net margins.
  
• The possibility of tariff protections in the U.S. could stabilize or even enhance Outokumpu's market share against Asian imports, potentially improving revenue and supporting pricing structures in the Americas.

Outokumpu Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Outokumpu Oyj's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.7% today to 2.7% in 3 years time.
• Analysts expect earnings to reach €194.2 million (and earnings per share of €0.43) by about May 2028, up from €-40.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €233 million in earnings, and the most bearish expecting €151.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.7x on those 2028 earnings, up from -36.6x today. This future PE is lower than the current PE for the GB Metals and Mining industry at 585.5x.
• 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 7.48%, as per the Simply Wall St company report.

Outokumpu Oyj Future Earnings Per Share Growth

Risks

• Ongoing geopolitical tensions and tariff discussions create uncertainty that might negatively impact the economic growth, impacting Outokumpu's future revenues and earnings.
  
• Increased low-priced Asian imports in Europe and North America could affect market share and pricing power, leading to reduced revenues in those markets.
  
• Weaker market conditions and low demand in both the European and American markets led to decreased deliveries and lower realized prices, posing a risk to revenue stability.
  
• The decision to delay strategic investments, such as the cold rolling capacity expansion in the U.S., might impact potential growth in revenues and margins if market conditions do not improve.
  
• Political strikes and operational issues have previously impacted earnings, demonstrating potential risks to future net margins if similar disruptions occur again.

Valuation

• The analysts have a consensus price target of €3.582 for Outokumpu 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 €4.5, and the most bearish reporting a price target of just €2.6.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €7.1 billion, earnings will come to €194.2 million, and it would be trading on a PE ratio of 9.7x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of €3.44, the analyst price target of €3.58 is 3.8% higher. 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.