Recovering Demand In Greentech And Defense Sectors Will Strengthen Future Prospects

Key Takeaways

• Improved profitability and expected demand rebound could enhance future revenue and net margins through cost adjustments and increased operating profit.
  
• Strong cash flow and strategic capacity expansion in Europe and U.S. suggest potential for investment, scaling operations, and long-term earnings growth.
  
• Weak demand in Communication and Greentech, coupled with inventory, profitability, and exchange rate challenges, threatens revenue stability and net margins amid geopolitical risks.

Catalysts

Provides electronics manufacturing services in Sweden, Finland, the United Kingdom, Bulgaria, Estonia, China, and internationally.

• NOTE expects demand to stabilize and eventually increase as new business programs move from industrialization to production phases, which should positively impact future revenue growth.
  
• The company is seeing improved profitability from cost adjustments and anticipates a further increase in operating profit if sales rebound, potentially enhancing net margins.
  
• Strong positive cash flow and a robust cash position offer NOTE opportunities for investments and dividends, which could support earnings growth and financial stability.
  
• The anticipated bounce-back in demand for Greentech and defense segments, particularly for EV chargers, is expected to drive future revenue growth once broader market conditions improve.
  
• Expanding capacity and potential acquisitions in Europe and possibly the U.S. indicate a strategic focus on scaling operations, which could lead to increased sales and earnings in the long term.

NOTE Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NOTE's revenue will grow by 9.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.4% today to 7.9% in 3 years time.
• Analysts expect earnings to reach SEK 402.6 million (and earnings per share of SEK 13.89) by about March 2028, up from SEK 248.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.6x on those 2028 earnings, down from 18.8x today. This future PE is lower than the current PE for the GB Electronic industry at 24.4x.
• Analysts expect the number of shares outstanding to decline by 1.73% per year for 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.

NOTE Future Earnings Per Share Growth

Risks

• The demand in key segments such as Communication and Greentech remains weak, with Communication running 17% below 2023 levels and Greentech faced with persistent underperformance despite anticipation of growth. This could impact revenue and long-term market potential negatively.
  
• Stock reductions and inventory management challenges have led to a 5% decline in sales, indicating ongoing headwinds in inventory and supply chain management, possibly affecting revenue stability.
  
• The profitability in non-European segments, namely Rest of the World, has notably declined to 5.2%, down from previous years. This could impact overall net margins if improvements in these areas are not realized quickly.
  
• Exchange rate fluctuations, especially regarding the U.S. dollar, have caused negative effects on profitability. Persistent foreign exchange volatility could continue to impact net margins.
  
• Potential geopolitical tensions and economic uncertainties, particularly within Europe, pose risks to regional growth prospects, potentially impacting earnings if the European Union does not implement strategic growth initiatives.

Valuation

• The analysts have a consensus price target of SEK157.0 for NOTE 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 2028, revenues will be SEK5.1 billion, earnings will come to SEK402.6 million, and it would be trading on a PE ratio of 12.6x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of SEK163.4, the analyst price target of SEK157.0 is 4.1% 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.