LED Saturation And Circular Shifts Will Erode Valuation

Key Takeaways

• Sustainability initiatives and longer product lifespans are reducing demand for new lighting products, negatively affecting Signify's core revenue growth prospects.
  
• Margin pressure, market saturation, and rising operational complexity constrain earnings growth, while reliance on volatile or lower-margin markets increases business risk.
  
• Expansion in connected lighting, operational agility, and strategic market focus underpin Signify's resilient growth, profitability, and strong positioning for sustained future earnings.

Catalysts

Provides lighting products, systems, and services in Europe, the Americas, and internationally.

• The increasing adoption of sustainability and circular economy initiatives is reducing replacement cycles and shrinking demand for new lighting products, which over the long term is likely to have a negative impact on Signify's core revenue growth, particularly as circular revenues now exceed 37 percent and product lifespan improvements continue to accelerate.
  
• Ongoing global economic instability and persistent high interest rates threaten to curtail public and private infrastructure spending, especially in Europe and emerging markets, which will likely dampen project-driven sales and impair both the Professional and Consumer business lines, resulting in below-trend top-line growth.
  
• Intensifying pricing pressure, especially in the OEM and non-connected components segment, driven by low-cost Asian manufacturers and continued price erosion, is expected to compress gross margins further as evidenced by the OEM's 240 basis-point EBITA margin decline, directly impacting earnings sustainability.
  
• LED market saturation in developed economies and the structural decline of the Conventional business-with a 27 percent sales drop this quarter-highlight that most of Signify's growth is now reliant on highly competitive, lower-margin, or more volatile markets, limiting opportunities for significant organic revenue expansion.
  
• Heightened geopolitical risk, supply chain disruptions, and increasing regulatory requirements (such as tariffs, cybersecurity, and compliance) may drive up operating costs and complexity, threatening future net margins and making cost reductions increasingly difficult now that the one-off restructuring benefits have already been fully realized.

Signify Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Signify compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Signify's revenue will decrease by 1.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 5.7% today to 4.7% in 3 years time.
• The bearish analysts expect earnings to reach €272.4 million (and earnings per share of €2.18) by about July 2028, down from €351.0 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 8.6x on those 2028 earnings, up from 7.1x today. This future PE is lower than the current PE for the GB Electrical industry at 11.4x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.1%, as per the Simply Wall St company report.

Signify Future Earnings Per Share Growth

Risks

• Signify has demonstrated strong and consistent growth in connected and specialty lighting across all business segments and geographies, with connected lighting now representing over one third of total sales and a significant installed base expansion, which supports stronger long-term revenue stability and growth.
  
• Execution of a successful €200 million cost-saving program coupled with ongoing agility in cost management and resource redeployment has led to improvements in profitability and robust gross margins, indicating the company's ability to protect or improve net margins even in challenging environments.
  
• The company's track record of strong project momentum in Professional lighting, evidenced by sequential margin improvement and market share gains in Europe, shows successful repositioning and strategic focus on higher-growth areas, helping to offset declines elsewhere and positively impact operating income.
  
• The Consumer business continues to show positive momentum, particularly in connected home products, with visibility into Q4 demand and repeated strong seasonal performance, which bodes well for future earnings and top-line growth.
  
• Signify's ability to adapt pricing and offset tariff and cost headwinds through a mix of pricing strategies, cost discipline, and supply chain agility has preserved gross margins, supporting resilience in operating results and the prospect for sustained or improved earnings performance going forward.

Valuation

• The assumed bearish price target for Signify is €15.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Signify'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 €33.0, and the most bearish reporting a price target of just €15.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €5.8 billion, earnings will come to €272.4 million, and it would be trading on a PE ratio of 8.6x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of €20.16, the bearish analyst price target of €15.0 is 34.4% lower.
  
• 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.