US Onboarding And European Defense Expansion Will Drive Progress

Key Takeaways

• Expanding defense sector opportunities in North America and Europe could diversify revenue streams and increase earnings potential.
  
• Implementation of the Odoo-based MRP system standardizes operations and improves data management, enhancing operational efficiencies and net margins.
  
• Ongoing production delays and strategic dependencies in the aerospace industry may challenge Velocity Composites' revenue stability and financial outlook.

Catalysts

Provides engineered composite material kits and related products to the aerospace industry in the United Kingdom, Europe, the United States, and internationally.

• The successful onboarding of programs in the U.S. facility, coupled with the ramp-up of production rates by key aerospace manufacturers like Boeing and Airbus, is expected to significantly boost revenue growth.
  
• Improvements in operational efficiencies, including better labor utilization and inflation adjustments, have driven gross margin enhancements, which should positively affect net margins.
  
• The focus on expanding defense sector opportunities in both North America and Europe could diversify revenue streams and potentially increase earnings.
  
• Implementing the Odoo-based MRP system across U.K. and U.S. sites, leading to standardized operations and improved data management, is anticipated to drive operational efficiencies and improve net margins.
  
• Planned right-sizing of contracts to manage inflationary factors more effectively will likely contribute to financial stability and bolster net margins by ensuring pricing is aligned with market conditions.

Velocity Composites Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Velocity Composites's revenue will grow by 13.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.7% today to 3.0% in 3 years time.
• Analysts expect earnings to reach £1.0 million (and earnings per share of £0.02) by about April 2028, up from £-845.0 thousand 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 39.4x on those 2028 earnings, up from -15.0x today. This future PE is greater than the current PE for the GB Aerospace & Defense industry at 25.2x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.74%, as per the Simply Wall St company report.

Velocity Composites Future Earnings Per Share Growth

Risks

• Ongoing issues in the aerospace industry, such as delays in production rates for Boeing's 737 and Airbus's A350, may continue to impact customer orders and consequently affect Velocity Composites' revenue and future earnings.
  
• The dependency on major aerospace programs and customers in the U.S. and Europe, such as Boeing and Airbus, exposes Velocity Composites to risks related to these companies' production and strategic decisions, potentially impacting the company's revenue consistency.
  
• The company's ongoing need to manage cash carefully, with a reduction in cash reserves despite a positive cash flow from operations, indicates a potential risk to finances if growth or new contracts do not materialize as expected, affecting cash flow and liquidity.
  
• Increases in labor and material costs and the need to negotiate price adjustments with customers due to inflation could pressure profit margins, potentially impacting overall profitability and increasing the risk of financial strains.
  
• The reliance on future onboarding of final U.S. contracts and expansion into additional defense sector opportunities is critical to projected financial improvements, highlighting execution and dependence risks that could affect future earnings and operational stability.

Valuation

• The analysts have a consensus price target of £0.6 for Velocity Composites based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £33.4 million, earnings will come to £1.0 million, and it would be trading on a PE ratio of 39.4x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of £0.24, the analyst price target of £0.6 is 60.8% 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.