China Tariffs And Supply Chain Fragmentation Will Erode Long-Term Viability

Key Takeaways

• Rising geopolitical and supply chain risks, along with slowing market demand and acquisition dependence, threaten ASSA ABLOY's profit margins and long-term growth prospects.
  
• Digital transformation and major tech competition may erode traditional product sales and pricing power, narrowing the company's established revenue base and market position.
  
• Strategic acquisitions, innovative smart technologies, and operational efficiencies are driving diversified growth, resilience, and sustained margin improvement amid challenging residential market conditions.

Catalysts

Provides door opening and access products for the institutional, commercial, and residential markets.

• The anticipated long-term impact of heightened global geopolitical instability and ongoing supply chain fragmentation, especially in China where tariffs have surged to punitive levels, is set to drive up input costs, erode operational flexibility, and increase the complexity of production relocation. This persistent risk threatens to compress margins and hinder top-line growth even if short-term mitigation through price increases is possible.
  
• A secular shift toward digital identity and contactless access could significantly reduce the need for traditional physical locking hardware, potentially cannibalizing a core portion of ASSA ABLOY's product revenues. If adoption of virtual access accelerates, legacy mechanical and even electromechanical product sales may structurally decline, undermining the company's established revenue base over time.
  
• ASSA ABLOY's heavy reliance on acquisitions to drive revenue and geographic diversification exposes the company to elevated integration risks and the potential for lower returns on invested capital. Prolonged acquisition activity without corresponding step changes in organic growth or margin accretion may drag on long-term earnings quality and pressure balance sheet metrics such as net debt-to-EBITDA.
  
• The combination of slowing population growth and urbanization in key developed regions and persistent challenges in residential construction across critical markets like China, North America, and Europe signals that demand for new building and retrofit solutions may fail to recover meaningfully. This trend will likely cap future addressable market expansion and restrict sustainable revenue growth.
  
• The evolving industry landscape, marked by growing commoditization of hardware solutions and the risk that major technology or software firms capture a disproportionate share of value in the integrated smart building and security market, endangers ASSA ABLOY's ability to command premium pricing. This environment could drive down average selling prices and result in sustained margin erosion.

ASSA ABLOY Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on ASSA ABLOY compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming ASSA ABLOY's revenue will grow by 2.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.6% today to 11.5% in 3 years time.
• The bearish analysts expect earnings to reach SEK 19.2 billion (and earnings per share of SEK 15.9) by about July 2028, up from SEK 14.6 billion 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 18.3x on those 2028 earnings, down from 22.9x today. This future PE is lower than the current PE for the GB Building industry at 23.7x.
• 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 6.68%, as per the Simply Wall St company report.

ASSA ABLOY Future Earnings Per Share Growth

Risks

• Strong long-term momentum in commercial non-residential markets, fueled by growth in institutional verticals like education, healthcare, and rapidly expanding data center demand, is offsetting residential market weakness and supporting continued top-line revenue growth.
  
• Ongoing investment in R&D and successful innovation in digital locks, mobile access, and integrated smart building solutions are positioning ASSA ABLOY to capture higher-margin, recurring revenue streams, boosting both revenue and net margins over time.
  
• Strategic acquisitions in emerging and core markets, such as InVue and Uhlmann & Zacher, are broadening ASSA ABLOY's product portfolio and providing complementary growth, enhancing geographic diversification and revenue resilience.
  
• Scale advantages, global manufacturing footprint optimization, and operational efficiency programs like the Manufacturing Footprint Program 10 are enabling cost savings and potential margin expansion, supporting profitability and improving overall earnings quality.
  
• The company's ability to pass on input cost increases and tariffs through permanent price increases, combined with industry-wide tariff exposure, allows robust margin protection and positions ASSA ABLOY to maintain or even enhance net margins despite economic and political uncertainty.

Valuation

• The assumed bearish price target for ASSA ABLOY is SEK261.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of ASSA ABLOY'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 SEK410.0, and the most bearish reporting a price target of just SEK261.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SEK166.5 billion, earnings will come to SEK19.2 billion, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 6.7%.
• Given the current share price of SEK301.9, the bearish analyst price target of SEK261.0 is 15.7% 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.