Strong Orders In Sensing & Connectivity Will Boost Future Prospects

Key Takeaways

• Strong growth in Sensing & Connectivity and successful acquisitions are set to drive future revenue and earnings growth.
  
• Cost efficiencies and improved pricing ensure higher net margins, while expected lower finance costs support EPS growth.
  
• Persistent destocking, higher interest rates, and U.S. market volatility challenge discoverIE's revenue streams and acquisition-driven growth strategy.

Catalysts

Designs, manufactures, and supplies components for electronic applications worldwide.

• The Sensing & Connectivity division is showing strong growth in orders, up 20% organically, suggesting an improving sales trend that could boost the company's revenue and profitability in the near future.
  
• Cost efficiencies, improved pricing strategies, and production clustering have helped increase operating margins despite a decline in sales. These structural changes are likely to support higher net margins as sales recover.
  
• Interest rates have peaked, and with expected reductions, finance costs should decrease, positively impacting future earnings and supporting EPS growth.
  
• A robust acquisition pipeline with £70 million funding capacity for the second half, following a successful bolt-on acquisition, is poised to drive future revenue and earnings growth.
  
• Design wins have increased significantly (up 33% over two years), ensuring a long-term pathway to revenue growth as market conditions improve.

discoverIE Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming discoverIE Group's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.8% today to 6.8% in 3 years time.
• Analysts expect earnings to reach £32.0 million (and earnings per share of £0.28) by about May 2028, up from £16.0 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 31.7x on those 2028 earnings, down from 34.0x today. This future PE is greater than the current PE for the GB Electrical industry at 14.1x.
• Analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.36%, as per the Simply Wall St company report.

discoverIE Group Future Earnings Per Share Growth

Risks

• Declining sales: Sales have been down 4%, with a more significant drop of 10% organically, which could negatively affect future revenue streams, especially if the destocking issues persist longer than anticipated.
  
• Higher interest costs: Higher interest rates have reduced earnings per share by 4%, potentially impacting net margins and future earnings if interest rates do not decrease as expected.
  
• Destocking challenges: The Magnetics & Controls division is facing an 11% decrease in orders due to substantial destocking, which may prolong revenue challenges in that sector.
  
• U.S. market volatility: The North American market has slowed down by 19% following a previous surge, suggesting potential instability or over-reliance on specific market conditions that could impact revenue and earnings from this critical region.
  
• Acquisition risks: While acquisitions are seen as a growth strategy, the timing and ability to achieve the right transaction terms in a variable market could pose risks to earnings and future revenue expectations if not executed efficiently.

Valuation

• The analysts have a consensus price target of £8.095 for discoverIE Group 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 £11.1, and the most bearish reporting a price target of just £5.8.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £472.0 million, earnings will come to £32.0 million, and it would be trading on a PE ratio of 31.7x, assuming you use a discount rate of 9.4%.
• Given the current share price of £5.67, the analyst price target of £8.09 is 30.0% 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.