2025 Housing Projects And Residential Expansion Will Drive Future Success

Key Takeaways

• Focus on middle income and residential segments, plus new projects, could drive revenue growth with higher prices and demand.
  
• Cost optimization and government housing program participation may enhance margins and create new revenue streams.
  
• Reliance on government housing programs and inventory investment may strain liquidity and revenue growth amid rising SG&A costs and policy change risks.

Catalysts

Designs, constructs, markets, and promotes low-income and middle-income residential housing developments in Mexico.

• The shift towards middle income and residential segments is expected to continue throughout 2025, which could boost revenue due to higher selling prices and demand in these segments.
  
• New project openings are planned in 2025, with 11 new phases and 5 entirely new projects, potentially increasing revenue and inventory turnover as these projects come to market.
  
• Cost optimization efforts, including downsizing in the commercial division, could enhance operational margins by reducing SG&A expenses in subsequent quarters.
  
• Participation in government housing programs could lead to additional revenue streams and increased sales volumes if partnerships are secured.
  
• With a strong land bank and disciplined inventory investment aimed at meeting 2025 targets, ARA is positioned for future revenue growth and improved cash flows as new projects and phases come online.

Consorcio ARA S. A. B. de C. V Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Consorcio ARA S. A. B. de C. V's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.9% today to 9.4% in 3 years time.
• Analysts expect earnings to reach MX$839.8 million (and earnings per share of MX$0.64) by about May 2028, up from MX$727.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.5x on those 2028 earnings, up from 5.4x today. This future PE is greater than the current PE for the MX Consumer Durables industry at 5.4x.
• Analysts expect the number of shares outstanding to decline by 2.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 18.61%, as per the Simply Wall St company report.

Consorcio ARA S. A. B. de C. V Future Earnings Per Share Growth

Risks

• The substantial investment in inventory has led to negative free cash flow, which may continue to affect financial flexibility and liquidity in the short term. This could impact cash reserves and the ability to finance new opportunities.
  
• The completion of a significant affordable entry-level housing project has led to a decrease in revenue from this segment by 7.5%. The time required to develop and generate revenue from new projects may temporarily hinder revenue growth.
  
• The increase in SG&A expenses due to higher promotions, advertising, and severance payments could pressure net margins if these costs are not offset by the expected increase in sales from new housing segments.
  
• The reliance on home financing programs and government housing initiatives poses risks if there are policy changes or reductions in available credit for homebuyers, impacting future revenue growth.
  
• Cash and cash equivalents decreased by 8.2% due to debt servicing, which may strain liquidity, particularly if cash flow generation does not improve as expected; this could affect the company's ability to invest or handle unforeseen expenses.

Valuation

• The analysts have a consensus price target of MX$6.883 for Consorcio ARA S. A. B. de C. V 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 MX$13.0, and the most bearish reporting a price target of just MX$3.75.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MX$8.9 billion, earnings will come to MX$839.8 million, and it would be trading on a PE ratio of 15.5x, assuming you use a discount rate of 18.6%.
  
• Given the current share price of MX$3.24, the analyst price target of MX$6.88 is 52.9% higher.
  
• 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.