Intensified Regulation And Deglobalization Will Curtail Automation Prospects

Key Takeaways

• Rising regulatory scrutiny, competitive pressure, and hardware commoditization are expected to constrain growth and erode margins in Hexagon's core software and geospatial businesses.
  
• Ongoing dependence on acquisitions and increasing R&D investment risks undermine free cash flow and threaten future earnings quality.
  
• Hexagon's innovation, recurring software growth, strategic realignment, and strong financial discipline enhance its position to capitalize on accelerating automation and digitalization trends globally.

Catalysts

Provides geospatial and industrial enterprise solutions worldwide.

• Hexagon's long-term growth is likely to be constrained by intensified regulatory scrutiny and mounting compliance costs surrounding data privacy, cybersecurity, and AI-driven digitalization, directly impacting the profitability and future revenues of its high-margin software and geospatial analytics businesses.
  
• Deglobalization, increasing trade barriers, and the reshoring of manufacturing threaten to dampen cross-border industrial expansion, severely restricting Hexagon's organic growth opportunities in emerging markets and placing pressure on top-line development for its core metrology and automation platforms.
  
• The commoditization of hardware sensors and imaging technologies is expected to accelerate, steadily eroding Hexagon's competitive advantages and dragging down pricing power; this deflationary dynamic significantly undermines the gross margin profile and limits earnings growth despite ongoing product launches.
  
• Hexagon is likely to face escalating competition from both tech giants and agile SaaS startups in the digital twin, industrial automation, and geospatial sectors, which will result in persistent pricing pressure and utilimately translate into structurally lower revenue growth and shrinking net margins over the long term.
  
• Continued reliance on large-scale bolt-on acquisitions raises the risk of future integration failures and potential asset write-downs; combined with more demanding R&D investment needs to keep pace technologically, this will drain free cash flow and depress returns on capital, further damaging Hexagon's long-term earnings quality.

Hexagon Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Hexagon compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Hexagon's revenue will grow by 3.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 17.3% today to 20.3% in 3 years time.
• The bearish analysts expect earnings to reach €1.2 billion (and earnings per share of €0.46) by about August 2028, up from €941.9 million 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 21.1x on those 2028 earnings, down from 27.9x today. This future PE is lower than the current PE for the GB Electronic industry at 28.9x.
• 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 6.51%, as per the Simply Wall St company report.

Hexagon Future Earnings Per Share Growth

Risks

• Hexagon's strong innovation pipeline and recent major product launches in robotics, AI, and automation, such as AEON humanoid robots and the MAESTRO CMM platform, position the company to benefit from secular digitalization and automation trends, which could lift organic growth and support higher revenues and margins starting in 2026.
  
• The company continues to grow its recurring and software revenue base, particularly in ALI and SIG divisions, supported by double-digit SaaS growth rates and strategic realignment through the Octave spin-off, which increases revenue visibility and has the potential to lift profitability and net margins over time.
  
• Hexagon's expanding presence in rapidly growing industrial and geospatial verticals, evidenced by strong growth in the Americas and Asia (notably 10% growth in China for Manufacturing Intelligence), suggests that sustained global digitization and urbanization could re-accelerate revenue growth as macro headwinds ease.
  
• A robust balance sheet and proactive cost management, including a new cost improvement initiative and operational discipline leading to 104% cash conversion in the quarter, could drive improved earnings and free cash flow, strengthening Hexagon's ability to invest in R&D and strategic acquisitions that fuel long-term EPS growth.
  
• Ongoing investment in R&D and partnerships with leading technology firms (such as Microsoft and NVIDIA), coupled with strong customer relationships and pilot programs with industry leaders, position Hexagon to benefit disproportionately from future demand for data-driven solutions, potentially supporting top-line and margin expansion as industries pursue automation and sustainability agendas.

Valuation

• The assumed bearish price target for Hexagon is SEK88.94, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Hexagon'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 SEK144.88, and the most bearish reporting a price target of just SEK88.94.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €6.0 billion, earnings will come to €1.2 billion, and it would be trading on a PE ratio of 21.1x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of SEK109.25, the bearish analyst price target of SEK88.94 is 22.8% 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.