International Expansion In Defense Markets Will Secure Future Opportunities Amid Rising Demand

Key Takeaways

• Strong demand in Europe and support for Ukraine signal a positive revenue growth outlook due to defense needs.
  
• Expansion and new production facilities in the U.S. and international markets aim to boost revenue and operational efficiency.
  
• High reliance on international orders and ramp-up inefficiencies may stress margins amid geopolitical and sustainability challenges.

Catalysts

Provides products, services, and solutions for military defense, aviation, and civil security markets worldwide.

• Strong order backlog and high demand from international markets, particularly driven by defense needs in Europe and continued support for Ukraine, indicate a positive outlook for future revenue growth.
  
• Increasing scale and capacity through new production lines, facilities, and efficient manufacturing processes can potentially enhance net margins by reducing costs and improving operational efficiency.
  
• Expansion in the U.S., including new facilities for munitions and weapons systems, positions Saab to capitalize on the substantial U.S. defense budget, potentially boosting future revenue and earnings.
  
• Investment in technology, such as digitalization and automation, aims to improve productivity and operational efficiency, which could lead to higher net margins and better cost management.
  
• Development of new markets and ongoing negotiations for Gripen aircraft sales in countries like Thailand and Colombia could lead to significant future revenue streams and contribute to long-term growth.

Saab Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Saab's revenue will grow by 18.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.7% today to 7.9% in 3 years time.
• Analysts expect earnings to reach SEK 7.7 billion (and earnings per share of SEK 13.98) by about December 2027, up from SEK 4.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.7x on those 2027 earnings, down from 31.5x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 35.2x.
• Analysts expect the number of shares outstanding to grow by 0.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.79%, as per the Simply Wall St company report.

Saab Future Earnings Per Share Growth

Risks

• The startup costs and under absorption in the low-rate production for the T-7 trainer aircraft in the U.S. are expected to burden Aeronautics for the next couple of years, potentially impacting net margins.
  
• The need for extensive capacity and production ramp-up to meet demand could lead to inefficiencies and increased operational costs, affecting earnings.
  
• The ongoing supply chain challenges require continuous monitoring, and any disruptions could impact deliveries and thus affect future revenues.
  
• The high reliance on international orders (80% of order intake) might increase exposure to geopolitical risks, potentially impacting revenue stability.
  
• The increasing CO2 emissions due to high business activity and the necessary investments in sustainability initiatives might introduce additional costs, affecting net margins.

Valuation

• The analysts have a consensus price target of SEK 264.5 for Saab 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 SEK 294.0, and the most bearish reporting a price target of just SEK 225.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be SEK 97.0 billion, earnings will come to SEK 7.7 billion, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 4.8%.
• Given the current share price of SEK 233.2, the analyst's price target of SEK 264.5 is 11.8% 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.