Upcoming Aerostructures Uncertainties May Impact Margins, But Operational Efficiencies Will Support Future Profitability

Key Takeaways

• Challenges in the Aerostructures Division and defense market dependence pose risks to revenue and operational margins due to geopolitical uncertainties and potential spending disruptions.
  
• Acquisition-driven growth promises opportunity but carries integration risks, which, along with high R&D investments, could strain financials and impact earnings stability.
  
• Strong growth in orders, revenue, and cash flow from improved efficiencies and strategic initiatives boosts Leonardo's financial health and competitiveness in defense electronics and helicopters.

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.

• Despite an impressive order backlog and strong recent financial performance, the ongoing challenges with the Aerostructures Division, particularly related to the Boeing 787 program, pose significant uncertainties. The negotiations with potential partners and the impacts of Boeing's schedule and pricing issues could negatively affect both revenue stability and operational margins.
  
• The company's heavy reliance on core defense and security markets, combined with geopolitical uncertainties, creates a risk that any slowdown or disruption in defense spending, particularly from European countries, could impact Leonardo's order intake and long-term revenue growth.
  
• The significant planned inorganic growth through acquisitions and joint ventures, while promising, comes with execution risks. Delays or challenges in integrating new investments and achieving synergies could adversely impact earnings and financial performance.
  
• Although Leonardo is improving efficiencies, especially in procurement and operations, any unexpected increases in production costs or supply chain disruptions could pressure net margins and overall profitability.
  
• While Leonardo is pushing for geographical expansion and technological innovation, the high investment required for R&D and new technology development, particularly in AI and high-performance computing, could strain cash flows and leverage, potentially impacting earnings and financial stability.

Leonardo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Leonardo's revenue will grow by 6.3% annually over the next 3 years.
• Analysts are assuming Leonardo's profit margins will remain the same at 6.2% over the next 3 years.
• Analysts expect earnings to reach €1.3 billion (and earnings per share of €2.24) by about March 2028, up from €1.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.4x on those 2028 earnings, down from 23.8x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 35.3x.
• 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 9.2%, as per the Simply Wall St company report.

Leonardo Future Earnings Per Share Growth

Risks

• Leonardo achieved significant order growth, exceeding €20.9 billion, reflecting a 12.2% increase from the previous year, bolstering the company's revenue potential and backlog stability. Impact: Revenue and earnings.
  
• The company reported substantial revenue growth, from €16 billion to €17.8 billion, driven by efficiency improvements and supply chain stabilization, indicating potential for sustained financial performance. Impact: Revenue and net margins.
  
• Free operating cash flow surged by 26.7% to €826 million, surpassing guidance and demonstrating effective cash management, contributing positively to financial health and reducing net debt by 22.7%. Impact: Cash flow and debt reduction.
  
• Strong performance in Defense Electronics and Helicopters, with double-digit growth in orders and EBITA, suggests robust profitability and market competitiveness, enhancing future earnings prospects. Impact: EBITA and profit margins.
  
• Leonardo's proactive measures in portfolio optimization, including cost-saving initiatives and strategic joint ventures, aim to enhance operational efficiency and support future revenue streams, contributing to long-term financial stability. Impact: Operational efficiency and cost reduction.

Valuation

• The analysts have a consensus price target of €36.627 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 €52.5, and the most bearish reporting a price target of just €25.1.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €20.5 billion, earnings will come to €1.3 billion, and it would be trading on a PE ratio of 21.4x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of €43.75, the analyst price target of €36.63 is 19.4% 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.