US Market Recovery And Innovative Products To Accelerate Revenue And Profit Growth

Key Takeaways

• New product launches, especially in Europe, are improving gross margins through higher-margin offerings, enhancing revenue and profit margins.
  
• Structural reforms and cost reductions in the U.S. and Europe aim to boost profitability, supporting enhanced net margins.
  
• Economic uncertainties and market conditions globally could impact LIXIL's revenue growth and profitability across key domestic and international markets.

Catalysts

Through its subsidiaries, operates water technology and housing technology business in Japan and internationally.

• LIXIL is expecting a recovery in the U.S. market next fiscal year due to pent-up demand from immigrants and lower-income populations, potentially boosting revenue and profitability once supply can meet this demand.
  
• The company has launched numerous new, differentiated products, particularly in Europe, leading to improved gross margins through higher-margin offerings such as shower products. This product innovation is expected to continue contributing to revenue and profit margin growth.
  
• Structural reforms in both the U.S. and Europe, despite short-term costs, are anticipated to improve profitability. This focus on higher-margin products and business units, along with cost reductions, is expected to enhance net margins moving forward.
  
• LIXIL is experiencing improved operating cash flow, which has increased by ¥65.2 billion year-on-year. Continued cash flow improvements could facilitate investments in new products and markets, supporting future revenue and earnings growth.
  
• Government subsidies in markets like Japan and the U.S. for renovation and housing projects could unlock pent-up demand, augmenting revenue growth, especially from renovation projects where LIXIL products are prominently featured.

LIXIL Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LIXIL's revenue will grow by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.9% today to 1.9% in 3 years time.
• Analysts expect earnings to reach ¥30.4 billion (and earnings per share of ¥105.9) by about January 2028, up from ¥-13.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥38.0 billion in earnings, and the most bearish expecting ¥21.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.6x on those 2028 earnings, up from -37.3x today. This future PE is greater than the current PE for the JP Building industry at 21.0x.
• 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 9.25%, as per the Simply Wall St company report.

LIXIL Future Earnings Per Share Growth

Risks

• The sluggish real estate markets in Europe and the U.S., marked by high interest rates and weak housing demand, could hinder revenue growth and overall profitability for LIXIL in these vital international markets.
  
• The decline in new housing starts in Japan could negatively impact LIXIL’s LHT businesses, which rely heavily on the construction of new homes, potentially affecting revenue and net margins domestically.
  
• The slow recovery and ongoing structural reforms in key markets like the U.S. and Europe may lead to continued high costs and lower profitability in the short term, impacting earnings growth.
  
• Ongoing geopolitical risks and economic uncertainties, such as those related to the U.S. presidential elections and European market weaknesses, could result in volatile market conditions, further impacting revenue and net earnings.
  
• Potential challenges in the Chinese market, including competition from local manufacturers and a shift to lower-priced products, pose a threat to revenue growth and margin expansion for LIXIL's operations in China.

Valuation

• The analysts have a consensus price target of ¥1840.0 for LIXIL 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 ¥2300.0, and the most bearish reporting a price target of just ¥1700.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥1581.4 billion, earnings will come to ¥30.4 billion, and it would be trading on a PE ratio of 22.6x, assuming you use a discount rate of 9.3%.
• Given the current share price of ¥1725.5, the analyst's price target of ¥1840.0 is 6.2% 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.