Strong Cash Flow Will Support Potential Investments In EV Charger Market

Key Takeaways

• Stabilization of demand and cost realignment may increase net margins as volumes improve, supporting capacity building and future revenue growth.
  
• Strong cash flow, inventory reduction, and European production growth position the company for strategic investments and earnings enhancement.
  
• Stabilizing demand, stock reductions, currency fluctuations, weak production, and geopolitical challenges may limit future growth and affect revenue and margins.

Catalysts

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

• The stabilization of demand and expected growth in programs transitioning from industrialization to production phases are likely to positively impact future revenue, providing a foundation for capacity building.
  
• Improving profitability due to cost mitigation actions and the realignment of the cost base with new sales levels may lead to an increase in net margins as volumes return.
  
• The strong cash flow and balance sheet, supported by inventory reduction, position the company for potential investments or strategic initiatives that could enhance earnings.
  
• Regional production growth in Europe, despite economic challenges, suggests an upward trend in the company's European operations, likely supporting revenue growth and margin improvement.
  
• Anticipated recovery in segments such as Communication and Medtech, and potential growth in Greentech driven by the EV charger market, could drive revenue and positively impact future earnings.

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 February 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 12.7x on those 2028 earnings, down from 17.4x today. This future PE is lower than the current PE for the GB Electronic industry at 26.8x.
• Analysts expect the number of shares outstanding to decline by 1.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.35%, as per the Simply Wall St company report.

NOTE Future Earnings Per Share Growth

Risks

• Demand stabilization is occurring at a relatively low level, and while there is an expectation for growth, the current weak demand could limit future revenue growth.
  
• Ongoing stock reductions have severely affected sales in the past, and while this effect is said to be in its end phase, ongoing reductions could still impact top-line revenue in the short term.
  
• Fluctuations in foreign currency, particularly the strength of the dollar, can negatively impact profits, affecting overall earnings.
  
• Weak production volumes in certain regions, like Rest of the World, have led to declining profitability, which could continue affecting net margins if not addressed.
  
• Geopolitical economic challenges in Europe may continue to suppress regional sales and production growth, potentially affecting revenue stability.

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 12.7x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of SEK151.9, the analyst price target of SEK157.0 is 3.2% higher. 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.