Rising Emissions Regulations And Market Risks Will Erode Profitability

Key Takeaways

• Safran faces profitability and market share risks from decarbonization demands, disruptive propulsion technologies, and potential underperformance in next-generation investments.
  
• Geopolitical pressures, restricted export access, workforce shortages, and heavy exposure to cyclical air travel threaten overall revenue stability and margin strength.
  
• Robust demand in civil aviation and defense, technological leadership, and strategic expansion efforts are driving sustained growth, resilient margins, and long-term profitability.

Catalysts

Engages in the aerospace and defense businesses in France, rest of Europe, the Americas, the Asia-Pacific, Africa, and the Middle East.

• The ongoing global push for decarbonization and increasingly stringent emissions regulations could force Safran to significantly ramp up investment in new propulsion technologies at the expense of profitability, while also accelerating the obsolescence of legacy jet engines, leading to sustained upward pressure on research and development costs and a reduction in long-term earnings quality.
  
• Geopolitical tensions and rising protectionist measures may limit Safran's access to key export markets for both commercial aerospace and defense, exposing the company to the risk of stalling or declining international revenue streams precisely when growth in emerging markets has been assumed as a long-term tailwind in forecasts.
  
• Persistent workforce shortages and rising wage inflation in developed markets threaten to drive up operating and supply chain costs across Safran's global operations, compressing net margins at the very time when high operating leverage is amplifying the downside risk to earnings.
  
• Safran's disproportionate reliance on the cycle-sensitive commercial narrow-body market leaves its revenue and profitability especially susceptible to a secular stagnation or downturn in air travel demand, which could result in sharper-than-expected revenue declines and margin erosion if there is a sustained macroeconomic shock or if airline fleet renewal is slower than projected.
  
• The accelerated technological shift towards alternative propulsion systems-such as all-electric or hydrogen-powered aircraft-poses a structural threat to Safran's established engine programs, and if Safran's investments in next-generation propulsion underperform or lag the competition, this could trigger a long-term loss of market share, falling revenue, and declining returns on invested capital.

Safran Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Safran compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Safran's revenue will grow by 9.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 14.7% today to 12.3% in 3 years time.
• The bearish analysts expect earnings to reach €4.7 billion (and earnings per share of €11.21) by about September 2028, up from €4.3 billion 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 25.6x on those 2028 earnings, down from 27.2x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 31.4x.
• Analysts expect the number of shares outstanding to grow by 0.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.98%, as per the Simply Wall St company report.

Safran Future Earnings Per Share Growth

Risks

• Sustained global growth in air travel and very low aircraft retirement rates are fueling higher demand for both new engines and aftermarket services, which is enabling Safran to achieve double-digit organic revenue growth and substantially stronger operating margins, directly supporting long-term improvement in revenues and earnings.
  
• Safran's position as a technological leader and OEM partner with Airbus and Boeing in producing the widely used LEAP engines is maintaining strong commercial momentum, with continued order inflows and successful price increases, underpinning revenue and margin stability over the coming years.
  
• Expansion in high-value aftermarket services driven by higher shop visits, increased work scope, and escalated catalog pricing is delivering robust growth in high-margin recurring revenue streams, which is accelerating operating income and supporting resilient net margins.
  
• Strategic moves such as the acquisition of Collins actuation and flight controls, record increases in production capacity, and a pipeline of cost synergies are enhancing Safran's scale, product offering, and operating leverage, contributing to long-term profit growth and margin expansion.
  
• A significant step up in defense spending in Europe and globally, buoyed by increased NATO commitments and export momentum (notably the Rafale program), is expected to double Safran's defense and space revenues by 2030, providing diversification and underpinning sustained growth in group revenue and earnings.

Valuation

• The assumed bearish price target for Safran is €231.86, which represents two standard deviations below the consensus price target of €307.07. This valuation is based on what can be assumed as the expectations of Safran'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 €370.0, and the most bearish reporting a price target of just €219.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €38.3 billion, earnings will come to €4.7 billion, and it would be trading on a PE ratio of 25.6x, assuming you use a discount rate of 7.0%.
• Given the current share price of €280.9, the bearish analyst price target of €231.86 is 21.1% 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.