High-Quality Orders And Restructuring Will Improve Future Prospects

Key Takeaways

• Focus on high-quality, margin-accretive orders in Services and Signaling is expected to boost revenue growth and future margins.
  
• Industrial restructuring and supply chain management improve operational efficiency, enhancing net margins and financial performance.
  
• Supply chain challenges, low-margin legacy contracts, and immature technology reliance strain Alstom's profitability, cash flows, and future revenue growth prospects.

Catalysts

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

• Alstom's strategy of focusing on high-quality, margin-accretive orders, especially in Services and Signaling, is expected to improve revenue growth and increase future gross margins.
  
• The company is conducting industrial restructuring to optimize its manufacturing setup, which aims to enhance operational efficiency and potentially improve net margins and earnings.
  
• Significant future opportunities lie in Alstom's strong order pipeline, especially in Europe, the Middle East, and Asia Pacific, with €200 billion expected in orders over the next three years, which could enhance revenue.
  
• Alstom's ongoing focus on project execution and mitigating supply chain challenges should lead to more efficient delivery volumes, which may improve both earnings and net margins as production stabilizes.
  
• Continuous improvement in gross margins in rolling stock and enhanced contract management could lead to better financial performance and higher profitability, enhancing adjusted EBIT and overall earnings.

Alstom Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alstom's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.4% today to 3.0% in 3 years time.
• Analysts expect earnings to reach €631.0 million (and earnings per share of €1.37) by about December 2027, up from €-253.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.0x on those 2027 earnings, up from -40.4x today. This future PE is lower than the current PE for the GB Machinery industry at 24.4x.
• 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 6.96%, as per the Simply Wall St company report.

Alstom Future Earnings Per Share Growth

Risks

• Supply chain challenges are causing significant delays in rolling stock production, impacting Alstom's ability to meet contractual deadlines and potentially leading to penalties, affecting future revenue and margins.
  
• A large portion of the current backlog consists of legacy contracts, which continue to weigh on Alstom’s profitability due to lower margins, impacting net earnings growth.
  
• The increased inventory levels due to production delays signify potential working capital challenges, which can strain cash flows and impact free cash flow targets.
  
• The reliance on new technologies with less mature supply chains, such as batteries and fuel cells, poses risks to seamless execution and could affect overall project costs, impacting gross margins.
  
• Weaker-than-expected market conditions in the Americas and green mobility sectors introduce revenue risks if similar trends persist, potentially affecting future revenue growth.

Valuation

• The analysts have a consensus price target of €23.52 for Alstom 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 €33.0, and the most bearish reporting a price target of just €9.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €20.7 billion, earnings will come to €631.0 million, and it would be trading on a PE ratio of 21.0x, assuming you use a discount rate of 7.0%.
• Given the current share price of €22.13, the analyst's price target of €23.52 is 5.9% 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.