Specialty Materials And Renewable Energy Initiatives Ignite Earnings Growth And Margin Expansion

Key Takeaways

• Strategic projects and acquisitions aim to enhance Arkema's earnings growth and stability, leveraging mega trends in energy and healthcare.
  
• Focus on renewable energy and operational efficiency expected to decarbonize value chain and improve margins.
  
• Continued soft demand and macroeconomic challenges, particularly in Europe, risk Arkema's revenue and earnings growth, with additional pressure from currency fluctuations and financial constraints.

Catalysts

Manufactures and sells specialty chemicals and advanced materials worldwide.

• Arkema is preparing for a midterm future with significant projects nearly fully financed, expected to contribute around €100 million of additional EBITDA annually up to 2028. This will positively impact the company's earnings growth.
  
• The company anticipates improved production efficiency and the use of renewable energy sources to further decarbonize its value chain, likely reducing operating costs and improving net margins.
  
• There are multiple organic growth projects in Specialty Materials, particularly in Advanced Materials and Coating Solutions, poised to leverage mega trends like energy and healthcare, suggesting potential for increased revenue.
  
• A strategic forecast includes benefiting from ramp-up in projects that independently of macroeconomic conditions are expected to generate substantial EBITDA, likely to enhance Arkema’s earnings stability and growth.
  
• The recent acquisition of new businesses like Dow’s adhesives is expected to expand Arkema's portfolio and provide synergistic benefits, contributing to improved net margins and revenue growth over the next few years.

Arkema Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arkema's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.6% today to 7.5% in 3 years time.
• Analysts expect earnings to reach €815.5 million (and earnings per share of €10.84) by about December 2027, up from €346.0 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 12.2x on those 2027 earnings, down from 15.8x today. This future PE is lower than the current PE for the GB Chemicals industry at 21.5x.
• Analysts expect the number of shares outstanding to decline by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.51%, as per the Simply Wall St company report.

Arkema Future Earnings Per Share Growth

Risks

• Continued soft demand in a challenging macroeconomic environment, particularly in Europe, with no sign of rebound, poses a risk to Arkema's revenue and earnings growth.
  
• Weakness in the automotive sector, especially in Europe, could negatively impact Arkema's revenue and net margins, given their exposure to this market.
  
• Potential currency fluctuations, including the depreciation of the U.S. dollar and Latin American currencies relative to the euro, could adversely affect Arkema's reported earnings and revenues.
  
• A lack of improvement in working capital as a percentage of sales, alongside a high net debt to EBITDA ratio, could constrain financial flexibility and impact earnings if economic conditions worsen.
  
• The need for continued cost management and operational efficiencies, in light of slow electrification efforts in the automotive sector and broader macroeconomic challenges, may pressure net margins and earnings if execution is lacking.

Valuation

• The analysts have a consensus price target of €106.35 for Arkema 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 €125.0, and the most bearish reporting a price target of just €89.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €10.9 billion, earnings will come to €815.5 million, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 7.5%.
• Given the current share price of €72.2, the analyst's price target of €106.35 is 32.1% 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.