Obsolete Metrology And Global Trade Risks Will Erode Value

Key Takeaways

• Intensifying competition, rapid technological evolution, and price pressures threaten margins and market share, forcing higher R&D investment just to maintain position.
  
• Geopolitical and regulatory risks, including trade tensions and sustainability requirements, are increasing costs, supply chain volatility, and unpredictability in earnings.
  
• Strong order growth, strategic investment in automation and R&D, and diversification efforts position Renishaw for margin expansion and resilience amid evolving global manufacturing trends.

Catalysts

An engineering and scientific technology company, designs, manufactures, distributes, sells, and services technological products and services, and analytical instruments and medical devices worldwide.

• The accelerating pace of technological change in advanced manufacturing heightens the risk that Renishaw's core metrology and additive manufacturing offerings could become obsolete, necessitating relentless investment in research and development just to maintain market position. This dynamic threatens to erode margins and places long-term pressure on both earnings and return on capital, as the company may be forced to spend more with diminishing incremental revenue impact.
  
• Rising global trade protectionism and geopolitical tensions, especially between China, the US, and Europe, create a volatile environment for Renishaw given its substantial international exposure. Increasing tariffs, export controls, or regional localization could fragment demand and disrupt supply chains, leading to unpredictable swings in revenue and persistent revenue volatility.
  
• Increased competition from emerging lower-cost Asian manufacturers, particularly in China where price deflation pressures are ongoing, is likely to intensify, compressing industry-wide gross margins further and undermining Renishaw's ability to command premium pricing. This margin compression will negatively impact overall profitability-even if topline revenue grows slowly.
  
• Slower innovation compared to larger, more digitally-advanced peers in both metrology and additive manufacturing could cause Renishaw to lose market share over time. This will dampen revenue growth and put structural pressure on net margins, as the company fails to differentiate itself amid broadening adoption of alternative measurement technologies like AI-driven non-contact metrology.
  
• Growing regulatory emphasis on sustainability and environmental compliance may translate to higher operating costs and increased capital expenditure requirements for process adaptations, further straining margins and weighing on long-term earnings power at a time when the company is already absorbing higher labor costs that it cannot fully pass on to customers.

Renishaw Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Renishaw compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Renishaw's revenue will grow by 5.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 13.9% today to 15.2% in 3 years time.
• The bearish analysts expect earnings to reach £123.9 million (and earnings per share of £1.7) by about September 2028, up from £97.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 17.5x on those 2028 earnings, down from 23.6x today. This future PE is lower than the current PE for the GB Electronic industry at 27.6x.
• 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 8.26%, as per the Simply Wall St company report.

Renishaw Future Earnings Per Share Growth

Risks

• The company is experiencing robust order book growth in key regions, including consumer electronics and semiconductors in APAC and positive trends in the Americas, indicating potential for revenue acceleration as these end-markets benefit from long-term digitalization and automation trends.
  
• Significant ongoing investments in automation and IT systems, as well as targeted R&D for metrology and additive manufacturing, are expected to improve productivity and support premium product innovation, which could drive margin expansion and higher long-term earnings.
  
• The medical and analytical instruments divisions, though currently loss-making or soft, are described as having healthy order pipelines and high growth potential, suggesting that successful execution or external investment could diversify revenues and improve overall group profitability.
  
• Automation and process control remain major secular themes, with Renishaw's involvement in both internal and customer-facing automation supporting sustained demand for its solutions; adoption of advanced manufacturing globally could underpin recurring demand and revenue stability.
  
• Despite pricing pressure in China and APAC, the company maintains its premium position in technology and is investing in software to further differentiate its offerings, potentially allowing it to defend or grow gross margins and maintain healthy net margins even in competitive environments.

Valuation

• The assumed bearish price target for Renishaw is £23.8, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Renishaw's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £43.0, and the most bearish reporting a price target of just £23.8.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £812.6 million, earnings will come to £123.9 million, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 8.3%.
• Given the current share price of £31.75, the bearish analyst price target of £23.8 is 33.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.