International Alliances And Technology Drive Dynamic Growth In Aerospace And Defense Markets

Key Takeaways

• Strategic partnerships and international alliances aim to boost global market presence, enhancing revenue and margins through expanded capabilities.
  
• Efficiency initiatives and Aerostructures division transformation are expected to improve profitability by reducing costs and stabilizing financial performance.
  
• Reliance on Aerostructures and new technology, plus geopolitical and competitive pressures, could strain earnings and margins, while alliances risk cost overruns.

Catalysts

An industrial and technological company, engages in the helicopters, defense electronics and security, aircraft, aerostructures, and space sectors in Italy, the United Kingdom, rest of Europe, the United States, and internationally.

• Leonardo's establishment of a technology roadmap and aggressive industrial plan hints at future growth potential, particularly in defense and international markets, which should drive increased revenue.
  
• The company's emphasis on international alliances and joint ventures, such as those with Rheinmetall and GCAP, could expand its global market presence, potentially boosting revenue and margins due to expanded capabilities.
  
• The strategic focus on cybersecurity, highlighted by strong growth in orders and revenues, suggests enhanced profitability and contributes to higher net margins by capturing higher-margin market opportunities.
  
• Savings initiatives and a robust efficiency plan, aimed at achieving approximately €190 million in savings, are likely to improve net margins and earnings by reducing operational costs.
  
• The planned transformation of the Aerostructures division, through diversification and new business opportunities, could diminish its current drag on profitability, enhancing net earnings and stabilizing financial performance.

Leonardo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Leonardo's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 6.1% in 3 years time.
• Analysts expect earnings to reach €1.2 billion (and earnings per share of €2.06) by about November 2027, up from €704.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €810 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.4x on those 2027 earnings, down from 21.0x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 36.3x.
• Analysts expect the number of shares outstanding to grow by 0.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.88%, as per the Simply Wall St company report.

Leonardo Future Earnings Per Share Growth

Risks

• The reliance on the Aerostructures division poses risks due to ongoing challenges with Boeing, leading to potential underutilized capacity and financial strain impacting net margins and earnings.
  
• The competitive pressure in the Space division, particularly surrounding the SATCOM sector, could affect profitability due to high development costs and restructuring needs, impacting both revenue and margins.
  
• The political instability and potential shifts in defense spending related to geopolitical uncertainties could create variability in future defense contracts, affecting long-term revenue projections.
  
• Execution risk in expanding international alliances, such as those formed with Rheinmetall and GCAP, could lead to integration challenges or cost overruns, impacting earnings and net margins.
  
• The dependence on new technology and joint ventures for growth, including the Cyber and Space sectors, may involve significant upfront investments and slow returns, affecting short-term earnings and cash flow.

Valuation

• The analysts have a consensus price target of €26.21 for Leonardo 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 €30.0, and the most bearish reporting a price target of just €16.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €19.8 billion, earnings will come to €1.2 billion, and it would be trading on a PE ratio of 16.4x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of €25.68, the analyst's price target of €26.21 is 2.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.