Company's Sustainability Efforts And EV Market Focus Promise Future Opportunities

Key Takeaways

• Consolidating facilities and focusing on sustainability may enhance operating margins and attract environmentally focused clients, aiding revenue growth.
  
• Strategic acquisitions and a strong financial position support market expansion, potentially boosting future earnings and profitability.
  
• Economic pressures, soft automotive demand, and reliance on high-volume sales pose risks to revenue, earnings, and margin stability for HEXPOL.

Catalysts

Engages in development, manufacture, and sale of various polymer compounds and engineered products in Sweden, Europe, the Americas, and Asia.

• HEXPOL aims to improve efficiency by closing the Kennedale facility in Texas and consolidating production to other sites, which should enhance operating margins due to cost savings.
  
• The acquisition of Piedmont Resin Supply, with expertise in nylon compounding, positions HEXPOL to benefit from higher demand in sectors such as electric vehicles, potentially boosting future revenue.
  
• An emphasis on sustainability and reaching a 65% reduction in CO2 emissions positions the company attractively for clients with strong environmental objectives, which could support revenue growth.
  
• Investments in M&A, along with a focus on optimizing production processes, indicate a strategy for expanding market presence and enhancing future earnings.
  
• HEXPOL’s strong balance sheet with a high equity asset ratio and significant cash flow supports further growth investments and potential M&A, which can drive overall revenue and profitability.

HEXPOL Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HEXPOL's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.9% today to 12.0% in 3 years time.
• Analysts expect earnings to reach SEK 2.8 billion (and earnings per share of SEK 8.06) by about January 2028, up from SEK 2.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK2.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.4x on those 2028 earnings, up from 15.6x today. This future PE is lower than the current PE for the GB Chemicals industry at 21.4x.
• 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 5.26%, as per the Simply Wall St company report.

HEXPOL Future Earnings Per Share Growth

Risks

• The soft demand in the North American and European automotive sectors has led to lower sales, which can negatively impact future revenues and earnings.
  
• The substantial decrease in organic sales, primarily due to volume reductions, and the less profitable mix in North America may continue to pressure net margins.
  
• The strategic decision to sell and close production facilities to optimize operations carries execution risks and may affect the stability of revenue generation in the short-term.
  
• The reliance on high-volume sales periods to maintain profitability, as highlighted by lower sales in December due to customer shutdowns, exposes the company to significant variability in earnings and margins.
  
• Economic pressures leading to high customer inventories and affordability issues in the automotive market may persist, dampening demand and potentially impacting future revenue and earnings growth.

Valuation

• The analysts have a consensus price target of SEK113.8 for HEXPOL 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 SEK130.0, and the most bearish reporting a price target of just SEK100.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK23.1 billion, earnings will come to SEK2.8 billion, and it would be trading on a PE ratio of 16.4x, assuming you use a discount rate of 5.3%.
  
• Given the current share price of SEK100.4, the analyst's price target of SEK113.8 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.