Global Electrification And Reshoring Will Fuel EV And Semiconductor Demand

Key Takeaways

• Operational excellence, accelerated inventory reductions, and strategic investments in automation and R&D are driving rapid cash flow improvements and positioning for superior earnings growth.
  
• Expansion into EV, semiconductors, and energy transition markets, coupled with global production and sector expertise, sets the stage for sustained growth and margin gains.
  
• Continued declines in high-margin segments, rising CapEx and debt, and increased competition threaten Mersen's margins, revenue growth, and financial flexibility over the medium term.

Catalysts

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

• Analyst consensus expects Mersen's SiC and EV investments to weigh on margins before delivering revenue; however, delivery volumes are now set to accelerate markedly with a tenfold increase for ACC in Q4, positioning Mersen for a sharp, earlier-than-expected upswing in both top-line and divisional margins as EV and semiconductor demand rebounds.
  
• Analysts broadly agree that cost optimization and inventory reduction will drive incremental EBITDA, but Mersen's exceptional execution-exceeding their own inventory-reduction schedule by reducing inventories €32 million in just nine months-demonstrates an accelerated path to structurally higher free cash flow conversion, enabling faster deleveraging and a quicker reinvestment cycle that can amplify earnings growth.
  
• Mersen's global "produce where you sell" strategy, combined with US capacity expansion and active Indian rail/energy projects, positions the company as a primary beneficiary of global supply chain reshoring and energy transition investments, which is likely to expand addressable markets and allow for sustained double-digit revenue growth through the decade.
  
• The power electronics segment is rapidly growing, supported by structurally increasing demand for energy conversion and grid modernization; with a record €35 million contract backlog and breakthroughs in advanced materials, Mersen is poised to capture high-margin share in a long cycle, translating into operating leverage and outperformance versus peers.
  
• The upcoming CEO transition to Salvador Lamas-credited for improving operations and strategy-introduces operational rigor and sector expertise that is likely to accelerate both innovation and margin expansion, particularly as new investments in automation, digitalization, and R&D position Mersen to capture outsized gross margin gains in next-generation, high-value electrical markets.

Mersen Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Mersen compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Mersen's revenue will grow by 5.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 4.0% today to 7.1% in 3 years time.
• The bullish analysts expect earnings to reach €103.0 million (and earnings per share of €4.25) by about September 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 bullish analyst cohort, the company would need to trade at a PE ratio of 11.0x on those 2028 earnings, down from 11.5x today. This future PE is lower than the current PE for the GB Electrical industry at 14.7x.
• 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 11.49%, as per the Simply Wall St company report.

Mersen Future Earnings Per Share Growth

Risks

• Mersen is experiencing continued volume declines in high-margin segments like SiC semiconductors and solar due to cyclical slowdowns, which, combined with only a partial rebound expected in the near term, threatens to reduce overall revenue and compress group margins in coming years.
  
• The company's heavy investment cycle, aimed at expanding capacity in SiC and electric vehicles, is expected to outpace current organic top-line growth and will significantly raise amortization and depreciation expenses, likely weighing on net income and free cash flow for several years.
  
• Heightened CapEx, combined with no anticipated positive free cash flow for the full year and guidance of further debt increases in the second half, raises long-term concerns about leverage, which could impact the company's ability to maintain competitive financial flexibility and future earnings.
  
• Mersen's global footprint makes it acutely sensitive to shifting foreign exchange rates and regional demand, as seen from recent negative currency effects and pronounced sales declines in Asia, especially China, directly undermining reported revenue and operating profit.
  
• Secular industry trends toward digitalization and the risk of commoditization from low-cost Asian electrical components manufacturers threaten to erode Mersen's pricing power in its core materials and components businesses, pressuring long-term margins and revenue growth prospects.

Valuation

• The assumed bullish price target for Mersen is €34.2, which is the highest 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be €1.5 billion, earnings will come to €103.0 million, and it would be trading on a PE ratio of 11.0x, assuming you use a discount rate of 11.5%.
• Given the current share price of €23.3, the bullish analyst price target of €34.2 is 31.9% higher.
• 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.