Upcoming Acquisitions And Technological Advancements Will Improve MRO Capabilities And Support Sustainability

Key Takeaways

• Acquisition of key MRO and flight control activities boosts Safran's capabilities, enhancing future revenue and operating income potential.
  
• Innovation and sustainability focus, including advanced military systems and green technologies, positions Safran for revenue growth and margin improvement.
  
• Supply chain issues and reliance on hedging pose risks to revenue and margins, while acquisitions and external factors could impact short-term earnings.

Catalysts

Engages in the aerospace and defense businesses worldwide.

• Safran's acquisition of CRT, a U.S. MRO leader, and the upcoming acquisition of Collins actuation and flight control activities are expected to enhance Safran's MRO capabilities and product offerings, potentially boosting future revenues and recurring operating income.
  
• The increasing demand for equipment and defense, driven by higher OE volumes and a strong order book for advanced military systems, indicates potential for future revenue growth and enhanced operating margins in the Equipment & Defense business.
  
• The certification of new technology such as the LEAP-1A engine's high-pressure turbine durability kit and the full-fledged certification by EASA for the ENGINeUS 100 electric motor point towards innovation-driven revenue and margin growth with the potential for higher aftermarket profit recognition.
  
• Continuing operational excellence, as demonstrated by Safran's margin expansion and successful turnaround efforts in Aircraft Interiors, suggests the potential to improve net margins through process efficiencies and cost management.
  
• A strong focus on sustainability and technological advancements, such as hydrogen-fueled turbine engines and hybrid-electric propulsion systems, align with industry decarbonization trends, potentially driving future demand and increasing revenue streams aligned with global environmental goals.

Safran Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Safran's revenue will grow by 10.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.4% today to 11.6% in 3 years time.
• Analysts expect earnings to reach €4.4 billion (and earnings per share of €11.26) by about March 2028, up from €-667.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.3x on those 2028 earnings, up from -149.1x today. This future PE is greater than the current PE for the GB Aerospace & Defense industry at 28.3x.
• Analysts expect the number of shares outstanding to decline by 0.86% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.94%, as per the Simply Wall St company report.

Safran Future Earnings Per Share Growth

Risks

• Supply chain constraints have been impacting LEAP engine deliveries, with a 10% decrease in volumes in 2024, which could continue to affect revenue if issues persist.
  
• The reliance on commodity hedging and fluctuating exchange rates poses a risk, as unfavorable rates or hedging costs could impact net margins and financial predictability.
  
• The transition from CFM56 to LEAP engine aftermarket service may not lead to immediate margin benefits if operational efficiencies and profitability in new service contracts do not materialize as swiftly as planned.
  
• The divestment activities and acquisitions like the CRT acquisition and Woodward deal could incur transitional challenges or integration costs, potentially impacting short-term earnings.
  
• External factors such as potential tariffs, particularly on U.S. manufactured goods and aerospace parts, could increase operational costs and negatively impact net income.

Valuation

• The analysts have a consensus price target of €265.111 for Safran 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 €330.0, and the most bearish reporting a price target of just €219.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €37.6 billion, earnings will come to €4.4 billion, and it would be trading on a PE ratio of 29.3x, assuming you use a discount rate of 5.9%.
• Given the current share price of €238.6, the analyst price target of €265.11 is 10.0% 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.