Automation And Offshoring Will Pressure Automotive And Aerospace Margins

Key Takeaways

• Shift to offshoring and automation pressures revenue and margins, as clients demand cost reductions and AI integration, compressing project pricing and profitability.
  
• Rising costs, talent shortages, and ineffective M&A constrain global expansion while localization trends and sector concentration increase long-term earnings volatility.
  
• Expanding global reach, focus on higher-margin services, and investment in offshore capabilities position Alten to benefit from industry shifts and deliver sustained revenue and profit growth.

Catalysts

Operates as an engineering and technology consultancy company in France, North America, Germany, Scandinavia, Benelux, Iberian, Spain, Italy, the United Kingdom, the Asia-Pacific, Switzerland, Eastern Europe, and internationally.

• ALTEN is facing a fundamental shift in client demand as major sectors like automotive, aerospace, and telecoms rapidly ramp up offshoring to low-cost countries, but offshore projects deliver significantly less revenue per engineer and require much greater volume just to maintain current top-line levels, leading to persistent stagnation or even long-term revenue decline despite headline growth in headcount and project volume.
  
• Intensifying global automation and AI adoption threatens to compress demand for traditional engineering and IT consulting, with ALTEN's own management acknowledging that key clients are demanding cost-reducing AI integration from the outset, squeezing project pricing and putting ongoing pressure on net margins as ALTEN must pass most of the efficiency gains to clients just to win major tenders.
  
• Chronic STEM talent shortages are pushing up labor costs worldwide at the same time that ALTEN must invest heavily to internationalize its organization and expand low-cost capacity across geographies, resulting in structurally higher SG&A and management complexity that will increasingly offset any local efficiency gains, suppressing operating margins and net margins groupwide.
  
• Broadening localization and reshoring trends, especially in North America and Asia, favor domestic consultancies and threaten ALTEN's ability to grow or even defend its global market share, while exposure to cyclical downturns in overrepresented sectors like German automotive and European aerospace compounds the risk of recurring earnings volatility and missed growth targets.
  
• ALTEN's M&A-driven expansion is losing momentum, as attractive targets are snapped up by private equity at unsustainable multiples-management admits it is now only able to acquire smaller, less strategically relevant firms, raising the risk of future acquisition failures, integration issues, and future goodwill impairments, all of which threaten to further erode return on equity and long-term earnings power.

Alten Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Alten compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Alten's revenue will decrease by 0.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.5% today to 6.2% in 3 years time.
• The bearish analysts expect earnings to reach €255.6 million (and earnings per share of €7.52) by about July 2028, up from €186.4 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 11.3x on those 2028 earnings, down from 13.7x today. This future PE is lower than the current PE for the GB IT industry at 14.2x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.38%, as per the Simply Wall St company report.

Alten Future Earnings Per Share Growth

Risks

• Alten's position as a top global engineering and technology consulting firm, combined with its expanding international footprint and ability to manage complex, cross-border projects, could enable it to capture significant market share as clients increasingly consolidate work with a few large, capable suppliers, likely supporting revenue and earnings growth.
  
• Strong secular tailwinds such as the acceleration of digital transformation, increased investments in sustainability, decarbonization, and green technology (including nuclear, renewables, and EVs), underscore long-term demand for Alten's services, especially as regulatory and industry shifts drive more R&D and engineering outsourcing, which could lift overall revenues.
  
• Alten's focus on transitioning from technical assistance to higher-margin work package and project-based offerings, particularly in mature markets like France, has already improved project margins by 2 to 3 percentage points; further roll-out of this model globally could support sustained improvements in operating profit margins.
  
• Ongoing and targeted investments to build scale in offshore delivery centers (India, Morocco, Romania, Mexico, Vietnam) position Alten to remain competitive on cost and win large, global tenders, allowing the company to mitigate margin pressure from lower-priced geographies and absorb demand shifts, positively affecting both revenue scale and profitability over time.
  
• Alten's demonstrated resilience during prior downturns, robust free cash flow generation (8 percent of revenue), stable dividend payout, and continued discipline in pursuing bolt-on acquisitions-despite a challenging private equity environment-underscore operational flexibility and the potential to rebound quickly when market conditions improve, supporting both net income and shareholder returns in the medium to long term.

Valuation

• The assumed bearish price target for Alten is €66.82, which represents two standard deviations below the consensus price target of €97.54. This valuation is based on what can be assumed as the expectations of Alten'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 €114.0, and the most bearish reporting a price target of just €66.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €4.1 billion, earnings will come to €255.6 million, and it would be trading on a PE ratio of 11.3x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of €73.2, the bearish analyst price target of €66.82 is 9.5% 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.