Expansion Into Mexico And Product Launches Will Strengthen Future Performance

Key Takeaways

• Holley's strong leadership and digital enhancements position it for future revenue growth through market share gains and direct-to-consumer sales.
  
• Expansion into the Mexican market and strategic partnerships aim to boost revenue through innovative products and operational improvements.
  
• Weak consumer demand, high inflation, and inventory issues have led to decreased sales and cash flow, raising concerns about Holley's revenue and earnings outlook.

Catalysts

Operates as designer, manufacturer, and marketer of automotive aftermarket products for car and truck enthusiasts in the United States, Canada, Europe, and China.

• Holley has made significant strides in its transformation, assembling a strong leadership team and enhancing digital and consumer experience capabilities. This progress positions the company for future revenue growth through increased market share and robust direct-to-consumer sales.
  
• Holley has expanded its operations into the Mexican market via direct-to-distributor relationships, opening new avenues for revenue growth in an older car market enthusiastic about performance upgrades.
  
• Holley has demonstrated operational improvements, leading to cost savings of $7.8 million in 2024. These efforts have the potential to improve net margins by maintaining financial discipline while reinvesting in growth initiatives.
  
• New product launches and innovations, such as bundled product offerings and the expansion of chemical lines like NOS Octane Boosters, are expected to drive revenue growth by attracting more enthusiasts and meeting evolving consumer demands.
  
• Strategic partnerships with national retailers and an emphasis on enhancing B2B channels could lead to increased revenue and earnings by expanding Holley's market reach and strengthening its distribution network.

Holley Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Holley's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.9% today to 10.2% in 3 years time.
• Analysts expect earnings to reach $68.4 million (and earnings per share of $0.57) by about March 2028, up from $-23.2 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 11.2x on those 2028 earnings, up from -12.3x today. This future PE is lower than the current PE for the US Auto Components industry at 15.7x.
• Analysts expect the number of shares outstanding to grow by 0.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Holley Future Earnings Per Share Growth

Risks

• Holley's net sales decreased by roughly 10% in Q4 2024, and overall 2024 net sales were down compared to 2023 due to factors like weaker demand and reseller destocking, indicating challenges in maintaining revenue growth.
  
• Consumer confidence remains a concern, with high inflation impacting discretionary spending, which could affect Holley's revenue potential given its reliance on consumer spending in the enthusiast market.
  
• There was a reported net loss in 2024, partly due to significant non-cash impairment charges totaling $48.6 million, raising concerns about the company's overall earnings performance.
  
• Free cash flow decreased in 2024 compared to the previous year, owing to various factors including changes in accounts payable processes, potentially impacting future cash reinvestment and debt reduction capabilities.
  
• The company's guidance assumes consumer confidence will not worsen, introducing risk if consumer sentiment declines further, which could impact revenue projections and net margins.

Valuation

• The analysts have a consensus price target of $4.625 for Holley 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 $6.0, and the most bearish reporting a price target of just $3.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $670.8 million, earnings will come to $68.4 million, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $2.4, the analyst price target of $4.62 is 48.1% 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.