Electrify Division Expansion And International Acquisitions Boost Profitability And Earnings

Key Takeaways

• Decentralized operations and strategic M&A drive growth, efficiency, and potential improvements in margins amid slower organic growth.
  
• International acquisitions diversify geographical risks, aligning with economic trends to bolster future revenue and profitability.
  
• Delays in economic recovery and weak sector performance may impact revenue and earnings growth, while higher taxes could reduce profitability.

Catalysts

Operates as a technology company in Sweden, Denmark, Norway, Finland, Germany, the United Kingdom, Benelux, Poland, rest of Europe, North America, Asia, and internationally.

• Lagercrantz Group's strategy of decentralized operations allows subsidiaries to operate independently, which can drive specialized growth and efficiency improvements, potentially enhancing net margins and earnings.
  
• Continuous strong M&A activity, with plans to acquire 8 to 12 companies annually, could significantly increase top-line revenue and help offset slower organic growth.
  
• International expansion, particularly through acquisitions like the Mastsystem in Finland and CP Cases in the U.K., is expected to enhance revenue streams and diversify geographical risks, potentially stabilizing earnings.
  
• Solid growth prospects in divisions such as Niche Products, which reported strong revenue and margin improvements, could improve overall operational margins and drive profitability.
  
• Focus on infrastructure, electrification, and niche markets, such as electrification within the Electrify Division, aligns with broader economic trends, likely boosting future revenue and profitability.

Lagercrantz Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lagercrantz Group's revenue will grow by 13.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.5% today to 11.5% in 3 years time.
• Analysts expect earnings to reach SEK 1.5 billion (and earnings per share of SEK 6.89) by about December 2027, up from SEK 909.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK 1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.6x on those 2027 earnings, down from 48.1x today. This future PE is greater than the current PE for the GB Electronic industry at 25.8x.
• Analysts expect the number of shares outstanding to grow by 0.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.84%, as per the Simply Wall St company report.

Lagercrantz Group Future Earnings Per Share Growth

Risks

• Delays in economic recovery and unmet growth expectations could impact revenue projections, as the recovery has been slower than anticipated and pushed into 2025.
  
• Challenges in specific sectors, such as weakened demand in the construction sector and sluggish performance in Germany and Finland, could affect divisional revenues and EBITA margins.
  
• Slower organic growth compared to acquisition-driven growth may suggest weaknesses in natural market demand, potentially affecting long-term revenue stability.
  
• Profit growth slightly below the 15% target and issues such as lower cash flow performance could impact earnings and investor satisfaction.
  
• Increased tax rates due to expansions, particularly into higher tax regions like the U.K. and U.S., could compress net margins and reduce overall profitability.

Valuation

• The analysts have a consensus price target of SEK 202.0 for Lagercrantz Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be SEK 12.6 billion, earnings will come to SEK 1.5 billion, and it would be trading on a PE ratio of 34.6x, assuming you use a discount rate of 5.8%.
• Given the current share price of SEK 212.2, the analyst's price target of SEK 202.0 is 5.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.