Future Investments In Production And US Expansion May Face Challenges From Expected Revenue Declines

Key Takeaways

• Strategic investments in production and product development across key business units and acquisitions aim to boost revenue, margins, and earnings through enriched offerings.
  
• Focus on international expansion and talent development in growth sectors supports medium-term growth and positions well for market recovery.
  
• External pressures and strategic challenges are influencing Solid State's financial stability, with a focus on delayed contracts, acquisition reliance, and dividend cuts impacting growth.

Catalysts

Designs, manufactures, and supplies electronic equipment in the United Kingdom, rest of Europe, Asia, North America, and internationally.

• Solid State is investing in expanding its production and engineering capabilities, particularly in the Integrated Systems and RF antenna business units, which could lead to increased revenue and improved operating margins due to higher value-add and more complex system offerings.
  
• The acquisition of Gateway, a specialist in magnetics and ferrites, is expected to enhance product offerings and margins in the Components division, contributing to revenue growth and margin improvement through enriched product mix.
  
• The company's focus on broadening its range of higher-margin own-brand components, such as electromechanical devices and optoelectronics, is likely to bolster net margins and enhance customer stickiness, positively impacting both revenue and earnings.
  
• Solid State is actively pursuing international expansion, particularly in the U.S. market, which could significantly enhance revenue by tapping into the world's largest market for its products and services, with an emphasis on Made in the U.S.A. capabilities.
  
• Strategic investments in talent development and infrastructure, aimed at supporting critical growth areas like defense, med tech, and industrial IoT, are positioned to drive sustainable medium-term growth and earnings improvements, particularly as market conditions recover.

Solid State Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Solid State's revenue will decrease by -3.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.9% today to 0.1% in 3 years time.
• Analysts expect earnings to reach £104.5 thousand (and earnings per share of £0.01) by about January 2028, down from £5.3 million 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 345.6x on those 2028 earnings, up from 16.3x today. This future PE is greater than the current PE for the GB Electronic industry at 21.9x.
• Analysts expect the number of shares outstanding to decline by 35.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.84%, as per the Simply Wall St company report.

Solid State Future Earnings Per Share Growth

Risks

• The company has faced headwinds from destocking, industrial slowdown, and geopolitical uncertainties, which have delayed investments and slowed programs, potentially impacting revenue and earnings.
  
• Lower trading has affected operational gearing, reflecting negatively on the profit metrics further down, which could impact net margins.
  
• The postponement of the UK defense contracts could mean increased dependency on lumpier contracts, resulting in revenue volatility.
  
• Assessments of acquisition targets indicate reliance on securing earnings-enhancing deals, which may pressure organic growth efforts and could affect earnings if not timely or effectively integrated.
  
• Dividends have been cut due to a proportionate drop in earnings, which could signal uncertainty about the short-term financial outlook and confidence in sustained revenue growth.

Valuation

• The analysts have a consensus price target of £1.92 for Solid State 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 £124.0 million, earnings will come to £104.5 thousand, and it would be trading on a PE ratio of 345.6x, assuming you use a discount rate of 7.8%.
• Given the current share price of £1.52, the analyst's price target of £1.92 is 20.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.