EV Partnerships, Including Tesla, Will Drive Future Opportunities

Key Takeaways

• Strategic expansions and partnerships in emerging and high-growth sectors like EVs position Volex for robust future revenue growth.
  
• Vertical integration and cost optimization are key to maintaining strong margins, supporting consistent earnings growth amid inflationary pressures.
  
• Economic and political factors, alongside challenges in integration and investment reliance, pose risks to margins and revenue growth for Volex.

Catalysts

Manufactures and sells power and data cables in North America, Europe, and Asia.

• Volex has demonstrated significant revenue growth of 9.7% organically in the first half of the year. They have expanded their customer base, particularly in the medical sector in Europe and the off-highway sector in North America, which positions them well for future revenue growth.
  
• The company has strategically expanded its operational footprint by opening new facilities in India, Mexico, and Indonesia. These expansions bolstered cutting-edge capabilities and are expected to drive future revenue growth by aligning manufacturing capacity with customer needs.
  
• Volex's strategic partnerships in high-growth sectors like EVs (notably with Tesla) position it for accelerated revenue growth as the adoption of electric vehicles rises. This market expansion is expected to have a substantial impact on future revenues.
  
• Volex has maintained strong and consistent net margins of 9.2%, despite inflation and FX challenges. Their focus on vertical integration and cost optimization should continue to aid margin stability, aiding future earnings growth.
  
• The ongoing integration of Murat Ticaret has provided added stimulus to their growth path, with strategic investments in productivity and efficiency gains set to bolster profit margins and revenue growth.

Volex Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Volex's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.2% today to 5.1% in 3 years time.
• Analysts expect earnings to reach $62.6 million (and earnings per share of $0.32) by about February 2028, up from $43.5 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 20.7x on those 2028 earnings, up from 14.9x today. This future PE is greater than the current PE for the GB Electrical industry at 15.0x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.13%, as per the Simply Wall St company report.

Volex Future Earnings Per Share Growth

Risks

• The integration of Murat Ticaret may be challenged by inflationary pressures in Turkey, which could affect margins and operational costs. This might impact net margins.
  
• A reliance on investment in new projects and acquisitions, like TT Electronics, poses a risk if these ventures do not yield expected returns, potentially affecting revenue and earnings growth.
  
• The growth trajectory in sectors like medical technology is uncertain, with expectations of flat revenues due to prior one-off catch-up business, potentially impacting future revenue consistency.
  
• Economic and political changes, such as the aftermath of the U.S. presidential election, could lead to changes in trade policies and tariffs that might affect the company's global supply chain and operational costs, impacting net margins.
  
• The EV market, while currently strong, faces risks from policy changes and competition, especially in North America, which could affect long-term revenue projections if demand does not align with growth expectations.

Valuation

• The analysts have a consensus price target of £4.26 for Volex 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 £5.07, and the most bearish reporting a price target of just £3.49.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $62.6 million, and it would be trading on a PE ratio of 20.7x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of £2.79, the analyst price target of £4.26 is 34.5% 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.