Deteriorating Demand And Rising Costs Will Disrupt Rail Markets

Key Takeaways

• Shifting mobility trends and protectionist policies threaten Alstom's market access, revenue growth, and create higher operational risks outside its core regions.
  
• High leverage, integration setbacks, and tougher competition expose Alstom to margin compression, earnings instability, and long-term profitability challenges.
  
• Expansion into higher-margin services, operational efficiencies, and a de-risked global presence strengthen profitability, balance sheet, and resilience to macroeconomic and geopolitical uncertainties.

Catalysts

Provides solutions for rail transport industry in Europe, the Americas, the Asia Pacific, the Middle East, Central Asia, and Africa.

• Despite the current optimism from management around consistent order intake and backlog quality, Alstom faces a deteriorating long-term demand outlook due to increased global adoption of micro-mobility, electric vehicles, and the rise of remote work, which over time will erode the addressable market for large-scale rail solutions and create sustained pressure on revenue growth.
  
• Growing protectionism and localization requirements in major markets such as the United States and China undermine Alstom's ability to access international projects, exposing the company to stagnating or declining revenues outside its core European base while simultaneously increasing compliance, restructuring, and operational costs.
  
• The company's high leverage and reliance on continued free cash flow improvements are increasingly vulnerable as cyclicality returns to government infrastructure spending, with even minor downturns or project delays-already evident in delayed contracts in Norway, Romania, and sluggish decision-making in the Americas-likely to trigger working capital outflows and threaten earnings stability and debt servicing.
  
• Persistent integration risks from the Bombardier acquisition, in conjunction with ongoing restructuring in Germany and slow execution of standardization plans, create sustained margin compression risk; cost overruns or underperformance in transitioning legacy projects or scaling services could prevent the company from closing the wide gap between backlog and reported gross margins and result in long-term net margin underperformance.
  
• Intensifying global competition, especially from lower-cost, state-backed Asian manufacturers and disruptive Mobility-as-a-Service solutions, heighten the risk of pricing pressure and market share loss for Alstom, potentially stalling its order book and compressing profitability in key segments over the long term.

Alstom Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Alstom compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Alstom's revenue will grow by 1.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.8% today to 4.0% in 3 years time.
• The bearish analysts expect earnings to reach €773.3 million (and earnings per share of €1.2) by about July 2028, up from €142.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.8x on those 2028 earnings, down from 72.3x today. This future PE is lower than the current PE for the GB Machinery industry at 28.8x.
• 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 8.12%, as per the Simply Wall St company report.

Alstom Future Earnings Per Share Growth

Risks

• Alstom is benefiting from strong, sustained global demand for rail driven by urbanization, decarbonization initiatives, and supportive government infrastructure plans, which drives multi-year backlog growth and supports stable or rising revenues.
  
• The company has completed its Bombardier integration and is executing on industrial efficiency, standardization, and footprint optimization programs, which are expected to increase margins and improve net earnings over the next several years.
  
• There is a material shift in the business mix toward higher-margin activities such as Services and Signalling, now representing almost 60% of order intake, which supports long-term margin expansion and higher profitability.
  
• Management's multi-local industrial strategy positions Alstom to win large, locally protected contracts in major markets (Europe, US, India, Australia), reducing geopolitical and localization risks and providing resilience to revenue and earnings streams.
  
• Alstom has successfully deleveraged and improved its balance sheet, significantly reducing net debt and financial expenses, which increases flexibility for future investment and supports higher free cash flow and earnings potential.

Valuation

• The assumed bearish price target for Alstom is €11.7, which represents two standard deviations below the consensus price target of €22.76. This valuation is based on what can be assumed as the expectations of Alstom's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €33.0, and the most bearish reporting a price target of just €9.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €19.3 billion, earnings will come to €773.3 million, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 8.1%.
• Given the current share price of €22.23, the bearish analyst price target of €11.7 is 90.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.