Intensified Competition And Tightening Regulations Will Undermine Prospects

Key Takeaways

• Intensifying competition, industry consolidation, and shifting customer demand threaten Avio's future market share, revenue growth, and negotiating power.
  
• Rising regulatory, environmental, and operational costs further pressure profitability and undermine competitiveness for new contracts.
  
• Avio's expanding order backlog, industry demand, technology upgrades, and U.S. market entry position it for long-term stable growth with reduced revenue risk.

Catalysts

Through its subsidiaries, designs, develops, produces, and integrates space launchers in Italy and internationally.

• Fierce technological competition from new entrants specializing in reusable rockets and alternative launch systems is expected to undermine Avio's cost and technological position, ultimately eroding market share and putting significant downward pressure on both revenue growth and profit margins in the medium to long term.
  
• Avio's heavy reliance on Vega and Ariane programs exposes the company to stagnating or declining orders as European institutional support plateaus and commercial alternatives gain traction, leading to structurally lower recurring revenues and increasing earnings volatility over time.
  
• Heightened regulatory and environmental scrutiny-particularly regarding launch emissions and potential future carbon pricing-poses the risk of sharply rising compliance and operational costs, which will likely compress net margins and threaten the company's competitiveness in winning new business.
  
• The scale and frequency of satellite launches may eventually saturate demand for small
• and medium-lift vehicles, especially as satellite miniaturization and commoditization progress, resulting in an oversupplied market and sustained price pressures that will diminish top-line growth.
  
• As larger industry players accelerate consolidation and vertical integration, Avio's position as a midsized specialist could increasingly limit its negotiating leverage and access to key contracts, driving down both revenue and long-term earnings potential despite the current record order backlog.

Avio Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Avio compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Avio's revenue will grow by 7.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.3% today to 4.0% in 3 years time.
• The bearish analysts expect earnings to reach €23.8 million (and earnings per share of €0.92) by about September 2028, up from €6.1 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 30.7x on those 2028 earnings, down from 155.5x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 40.8x.
• 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 10.15%, as per the Simply Wall St company report.

Avio Future Earnings Per Share Growth

Risks

• Strong growth in Avio's order backlog at a compound annual growth rate above 20 percent over six years, and a current backlog approximately four times annual revenue, provides high medium-term earnings visibility and reduces risk to revenue streams.
  
• Structural increase in demand for space and defense propulsion, highlighted by projected double-digit growth in defense revenues and expectations for order intakes of at least 150 million euros for defense activities in 2025, signals robust secular industry and company trends driving long-term revenue and profit growth.
  
• Capacity expansion and technological improvement, such as the successful development and future deployment of the P160 motor enabling increased payload and more competitive launches at limited incremental cost, can enhance Avio's cost structure and support margin expansion over time.
  
• Strategic entry into the U.S. defense market, with ongoing programs and customer relationships with Raytheon, the U.S. Army, and U.S. Navy, combined with plans for a greenfield U.S. production plant partially funded by U.S. government grants, opens significant new addressable markets and has the potential to bolster long-term growth in both revenue and net income.
  
• Strong and recurring institutional support for the Vega and Ariane programs, including expected continued European Space Agency funding and an expanding European and U.S. defense procurement environment, increases resilience to cyclical downturns and underpins stability and potential growth in Avio's future earnings and cash flows.

Valuation

• The assumed bearish price target for Avio is €21.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Avio'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 €34.5, and the most bearish reporting a price target of just €21.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €592.0 million, earnings will come to €23.8 million, and it would be trading on a PE ratio of 30.7x, assuming you use a discount rate of 10.1%.
• Given the current share price of €36.3, the bearish analyst price target of €21.0 is 72.9% 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.