Recurring Revenues And Robotics Launch Will Secure Future Prospects

Key Takeaways

• The spinoff of divisions into NewCo and the new Robotics division aim to improve focus and drive revenue growth, potentially enhancing earnings and profit margins.
  
• Strategic actions like tariff mitigation and new product investments could protect margins and contribute to stable, long-term revenue growth.
  
• Geopolitical issues and tariffs disrupt revenue and margins, with divisions like Manufacturing Intelligence and Geosystems particularly impacted by market weaknesses and currency challenges.

Catalysts

Provides geospatial and industrial enterprise solutions worldwide.

• The anticipated growth from recurring revenues, including subscription software, which increased by 10% during the quarter, suggests that this revenue model could support stable revenue growth over time.
  
• The spinoff of the ALI and SIG divisions into a new company, NewCo, to be listed in the U.S., could unlock shareholder value and improve operational focus on Hexagon’s core businesses, potentially impacting earnings positively.
  
• The launch of Hexagon's new Robotics division is expected to drive future revenue growth through initiatives in AI, measurement technologies, and humanoid robotics, with industrial application focus to address labor shortages.
  
• Strategic actions to mitigate direct impacts from tariffs through rerouting shipping, alternative sourcing, inventory management, and localization of U.S. manufacturing could protect net margins and earnings in the medium term.
  
• Increased investment in new product lines such as SDx2 in the ALI division, along with a strong pipeline of new products expected to make a material impact from 2026 onwards, could drive future revenue growth and enhance profit margins.

Hexagon Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hexagon's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.9% today to 21.8% in 3 years time.
• Analysts expect earnings to reach €1.4 billion (and earnings per share of €0.52) by about May 2028, up from €1.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €1.7 billion in earnings, and the most bearish expecting €1.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.8x on those 2028 earnings, up from 22.4x today. This future PE is lower than the current PE for the GB Electronic industry at 26.0x.
• 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 6.26%, as per the Simply Wall St company report.

Hexagon Future Earnings Per Share Growth

Risks

• Geopolitical uncertainties and new tariffs impacted March revenues significantly, disrupting growth expectations and leading to delays in shipments and orders. This could continue affecting revenue stability and operating margins.
  
• The company's cost base was positioned for growth based on early-year performance, but the unexpected March decline led to a misalignment, resulting in lower operating margins and earnings.
  
• Currency transaction headwinds negatively impacted margins, creating an additional layer of unpredictability and affecting overall earnings.
  
• Weakness in specific divisions like Manufacturing Intelligence and Geosystems, alongside reduced demand in key geographic markets such as Canada and Mexico, could hinder revenue growth and profitability.
  
• The prolonged uncertainties in customer demand and delay in decision-making, primarily driven by tariffs and geopolitical issues, pose risks to consistent revenue generation and could challenge the company's ability to maintain or grow net margins.

Valuation

• The analysts have a consensus price target of SEK118.736 for Hexagon 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 SEK152.5, and the most bearish reporting a price target of just SEK96.38.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €6.4 billion, earnings will come to €1.4 billion, and it would be trading on a PE ratio of 24.8x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of SEK93.68, the analyst price target of SEK118.74 is 21.1% 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.