Geopolitical Tensions And Disrupted Supply Chains Will Impair Profitability

Key Takeaways

• Exposure to cyclical end-markets and rapid industry change increases earnings volatility, with core products facing potential commoditization and margin pressure.
  
• Elevated input costs, regulatory burdens, and high capital spending threaten to compress margins, limit operating leverage, and constrain long-term profitability.
  
• Strong positioning in growth sectors and regions, effective cost management, and new leadership are expected to drive sustained profitability and long-term competitive advantage.

Catalysts

Manufactures and sells electrical power products and advanced materials in France, North America, rest of Europe, the Asia-Pacific, and internationally.

• Global supply chain disruptions and intensifying geopolitical tensions risk driving sustained cost inflation and logistical unpredictability for Mersen, which could materially compress future margins due to unavoidable higher input and operational costs and threaten access to growth markets, weighing on both revenue and earnings visibility.
  
• The company's growing dependence on highly cyclical end-markets like solar, semiconductors and electric vehicles exposes it to significant volatility; recent declines in the SiC semiconductor and solar segments, as well as muted outlooks for chemicals and process industries, suggest that revenue could remain stagnant or even contract during periods of sector downturn.
  
• The rapid pace of technological change and industry consolidation is heightening the risk that Mersen's core components-such as those for power conversion and advanced materials-could become commoditized or displaced by next-generation substitutes, potentially eroding pricing power and pressuring net margins.
  
• Despite ongoing high levels of capital expenditure, the company's large investments-particularly in SiC production-are occurring in the face of uncertain demand recovery, creating a scenario where depreciation and amortization outpace revenue growth, thereby reducing future operating leverage and suppressing earnings.
  
• Rising regulatory burden, increasing ESG compliance costs, and exposure to raw material price volatility-especially for graphite-could further compress net margins and absorb scarce management resources, creating sustained headwinds to long-term profitability even if headline revenues recover.

Mersen Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Mersen compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Mersen's revenue will grow by 3.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.0% today to 6.8% in 3 years time.
• The bearish analysts expect earnings to reach €92.0 million (and earnings per share of €3.78) by about August 2028, up from €49.4 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 7.9x on those 2028 earnings, down from 12.6x today. This future PE is lower than the current PE for the GB Electrical industry at 14.9x.
• Analysts expect the number of shares outstanding to decline by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.16%, as per the Simply Wall St company report.

Mersen Future Earnings Per Share Growth

Risks

• Continued robust investment and capacity expansions in power electronics, railway electrification, and aerospace-sectors experiencing secular growth driven by global energy transition and electrification-are likely to provide an ongoing lift to Mersen's revenues and gross profits.
  
• Strategic gains in market share, especially in fast-growing geographies like India and the U.S., supported by localized production and strong customer relationships, could allow Mersen to outperform regional peers and stabilize or grow revenue streams.
  
• The company's long-term adaptation plan and demonstrated pricing power, enabling annual productivity gains and offsetting cost escalation, can support margins and mitigate inflation or raw material price risks, positively impacting net margins and operating income.
  
• Significant investments in SiC semiconductor and EV infrastructure, while currently depressing margins due to amortization, position Mersen strongly for future demand waves; when the SiC, EV, and renewables markets recover, the company will be well-placed to benefit from operating leverage and margin expansion.
  
• The transition to the new CEO, who has a track record of accelerating growth and improving profitability in Mersen's high-potential businesses, may drive further operational efficiency and strategic focus, enabling sustainable earnings growth and improved investor confidence.

Valuation

• The assumed bearish price target for Mersen is €22.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Mersen'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 €34.2, and the most bearish reporting a price target of just €22.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €1.4 billion, earnings will come to €92.0 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 11.2%.
  
• Given the current share price of €25.55, the bearish analyst price target of €22.0 is 16.1% 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.