Expansion Into Digital Products And Composite Tapes Will Drive Future Opportunities

Key Takeaways

• Leadership in recycled products and expansion into new markets are poised to drive revenue growth and market share gains through innovation and sustainability.
  
• Operational efficiencies and pension derisking improve margins and capital allocation, enhancing earnings and shareholder value with strategic growth initiatives.
  
• Ongoing weakness in Performance Materials and dependency on industrial recovery risk revenue growth, while potential tariffs and management changes add further financial instability.

Catalysts

Manufactures and supplies industrial sewing threads worldwide.

• Coats' leadership in recycled products, with sales growing 144% to $405 million, is expected to drive market share gains and enhance revenue growth through innovation and sustainability focus.
  
• Operational efficiencies resulting from strategic projects, plant closures, and acquisition synergies are expected to improve net margins, particularly in the Performance Materials division.
  
• The derisking of the U.K. pension liabilities allows Coats to plan capital allocation with more certainty, enhancing free cash flow usage for strategic growth initiatives, which in turn is projected to positively impact earnings.
  
• Expansion into adjacent markets, such as digital products, composite tapes for energy, and engineered footwear uppers, representing a $1.3 billion incremental addressable market, is projected to accelerate revenue growth.
  
• Coats' medium-term target to increase EBIT margins to 19%-21% and organic EPS growth of over 10% annually through strategic sustainability, digital transformation, and innovation initiatives is expected to enhance overall profitability and shareholder value.

Coats Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Coats Group's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.4% today to 9.3% in 3 years time.
• Analysts expect earnings to reach $161.1 million (and earnings per share of $0.1) by about March 2028, up from $80.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $193.0 million in earnings, and the most bearish expecting $130.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.4x on those 2028 earnings, down from 21.5x today. This future PE is lower than the current PE for the GB Luxury industry at 48.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.09%, as per the Simply Wall St company report.

Coats Group Future Earnings Per Share Growth

Risks

• Ongoing weakness in Performance Materials, particularly due to market conditions and operational inefficiencies, could hinder overall revenue growth and margin improvements for Coats Group.
  
• The dependency on market recovery in the industrial and telecom sectors is critical for the success of Performance Materials, thereby posing a risk to the division’s future revenue and profit margins.
  
• Potential tariff implications, particularly related to Chinese and Mexican production, could introduce uncertainties in cost management, impacting net margins and profitability.
  
• The company’s medium-term targets are partly reliant on successful acquisitions in the highly competitive M&A landscape, where timing and execution risks could affect projected earnings growth.
  
• Changes in senior management, including the CFO stepping down, may introduce transitional risks that could impact financial strategy and execution, thus affecting earnings stability and net margins.

Valuation

• The analysts have a consensus price target of £1.225 for Coats 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 £1.35, and the most bearish reporting a price target of just £1.1.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.7 billion, earnings will come to $161.1 million, and it would be trading on a PE ratio of 20.4x, assuming you use a discount rate of 9.1%.
• Given the current share price of £0.84, the analyst price target of £1.22 is 31.4% 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.