UK Manufacturing Facilities And Defense Contracts Will Secure Stability

Key Takeaways

• Increasing focus on UK-based manufacturing and high-value, custom solutions enhances supply chain resilience, recurring revenues, and partnership opportunities in defense and government sectors.
  
• Strategic acquisitions and sector exposure are driving higher margins, stable growth, and an improved quality of earnings by shifting away from commoditized products.
  
• Heavy dependence on defense spending, acquisition risks, supply chain vulnerabilities, market volatility, and rapid industry change threaten earnings stability, margin quality, and consistent growth.

Catalysts

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

• Recent investments in UK-based manufacturing facilities (e.g., Ashchurch and Leominster) are enabling Solid State to meet growing demand for locally sourced, customized electronics and secure long-term government and defense contracts, positioning the company to benefit from the increasing emphasis on supply chain resilience and domestic sourcing in the UK and Europe; this is likely to boost recurring revenues and reduce earnings volatility in future years.
  
• Expansion in high-value, value-added solutions (custom engineering, systems integration) and successful integration of recent acquisitions (e.g., Q-PAR USA, Gateway) are expected to drive margin improvement, increase cross-selling opportunities, and accelerate revenue and EPS growth over the medium term.
  
• Strong exposure to sectors seeing secular tailwinds (defense, industrial automation, AI-driven edge computing, energy/transport electrification) positions Solid State for above-market revenue growth as these sectors increasingly require specialized and ruggedized electronic solutions.
  
• Emerging framework agreements and deepening relationships with blue-chip and government customers provide improved multi-year order visibility and support sustained growth in the order book, providing a more stable outlook for future revenue and operating margins.
  
• The company's proactive shift away from commoditized low-margin product lines toward engineering-led, high-specification solutions is expected to support blended net margin expansion and higher quality of earnings over time as demand for complex, mission-critical components rises.

Solid State Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Solid State's revenue will grow by 9.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.4% today to 3.4% in 3 years time.
• Analysts expect earnings to reach £5.6 million (and earnings per share of £0.11) by about July 2028, up from £512.0 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 28.8x on those 2028 earnings, down from 197.9x today. This future PE is lower than the current PE for the GB Electronic industry at 29.7x.
• Analysts expect the number of shares outstanding to decline by 0.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.56%, as per the Simply Wall St company report.

Solid State Future Earnings Per Share Growth

Risks

• Solid State's strategy relies heavily on ongoing governmental defense spending and the current positive outlook for the UK's Strategic Defence Review; any change in political will, budget prioritization, or defense cycles could cause a significant contraction in defense-related revenue (currently 30%), impacting both top-line growth and long-term earnings stability.
  
• The company's record of acquisitive growth introduces integration risks-recent acquisitions such as Custom Power required a significant goodwill write-down due to unexpected performance and industrial headwinds, suggesting that future deals may also fail to deliver anticipated synergies, potentially eroding net margins and lowering earnings quality.
  
• Headwinds persist in Solid State's U.S. Power and Components divisions, attributed to post-COVID destocking, industrial slowdowns, and exposure to cyclical order flows; these trends highlight underlying volatility and customer demand uncertainty, which threatens consistent revenue growth and operational leverage.
  
• Despite efforts to diversify sourcing, the company remains dependent on critical supply chains in regions like Taiwan, and efforts to shift to India are still in early stages; any supply chain disruption or increased geopolitical risk could raise input costs or interrupt production, directly pressuring gross margins and revenue delivery.
  
• Industry-wide risks such as rapid technology cycles and commoditization (especially in lower-margin product lines previously exited in the Power division) mean that maintaining engineering value-add and pricing power is an ongoing challenge; failure to innovate or to protect premium offerings could lead to product obsolescence and price erosion, dampening revenue growth and compressing long-term margins.

Valuation

• The analysts have a consensus price target of £2.28 for Solid State 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 £2.53, and the most bearish reporting a price target of just £2.03.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £162.3 million, earnings will come to £5.6 million, and it would be trading on a PE ratio of 28.8x, assuming you use a discount rate of 8.6%.
• Given the current share price of £1.78, the analyst price target of £2.28 is 21.7% 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.