Leica iCON Launch And Acquisitions Expected To Strengthen Future Prospects

Key Takeaways

• Strategic acquisitions and product launches aim to enhance technology offerings and capture new market opportunities for revenue growth and margin improvement.
  
• Transitioning to subscription-based sales and potential ALI division separation could stabilize cash flows and boost profitability with increased focus.
  
• Leadership changes and market-specific headwinds in key divisions pose risks to Hexagon's strategic direction and revenue growth, impacting future stability and profitability.

Catalysts

Provides geospatial and industrial enterprise solutions worldwide.

• Hexagon is launching new products, such as the Leica iCON trade solution, which contributed to organic growth in Geosystems, positioning the company to potentially boost revenues and margins in the future by capturing new market opportunities.
  
• Hexagon's strategic acquisitions, including companies like indurad, Geomagic, and Septentrio, are expected to enhance their technology offerings and market reach, supporting future revenue growth and potentially increasing net margins through synergies.
  
• The transition towards more subscription-based software sales, particularly in the Asset Lifecycle Intelligence (ALI) segment, is expected to drive recurring revenue growth and stabilize cash flows, positively impacting earnings predictability and margins.
  
• Changes in leadership, including the appointment of a new CEO with a focus on growth and experience in mergers and acquisitions, could lead to strategic initiatives that drive revenue growth and margin improvements.
  
• The proposed separation of the ALI division and a focus on recurring software revenues signal a potential increase in profitability and an improvement in net margins, as the business aligns into two focused and streamlined entities.

Hexagon Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hexagon's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.9% today to 22.2% in 3 years time.
• Analysts expect earnings to reach €1.5 billion (and earnings per share of €0.54) by about April 2028, up from €1.0 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €1.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.6x on those 2028 earnings, down from 26.0x today. This future PE is lower than the current PE for the GB Electronic industry at 26.1x.
• 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 6.27%, as per the Simply Wall St company report.

Hexagon Future Earnings Per Share Growth

Risks

• The leadership change at Hexagon, with an interim CEO and expected transition in 2025, could create uncertainty and affect strategic direction, potentially impacting future revenue growth and earnings stability.
  
• Continued weakness in the construction markets globally, particularly in key regions like EMEA and North America, presents a risk to revenue growth, especially for divisions reliant on these markets.
  
• The cyclical slowdown in important verticals for the Manufacturing Intelligence and Geosystems divisions suggests potential challenges ahead, potentially affecting net revenue and margins if these sectors don't recover swiftly.
  
• Challenges in the precision agriculture market within Autonomous Solutions and delays in mining reflect market-specific headwinds that could impact revenue growth and profitability if they persist.
  
• The ongoing spin-off investigation of ALI and potential adjustments related to this strategic shift could create financial uncertainty and operational disruptions, possibly affecting net margins and cash flows.

Valuation

• The analysts have a consensus price target of SEK125.705 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 SEK156.15, and the most bearish reporting a price target of just SEK98.33.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €6.6 billion, earnings will come to €1.5 billion, and it would be trading on a PE ratio of 25.6x, assuming you use a discount rate of 6.3%.
• Given the current share price of SEK106.6, the analyst price target of SEK125.7 is 15.2% 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.