MirrorEye And SMART2 Expansions Will Drive Future Opportunities

Key Takeaways

• Expansion of MirrorEye and tachograph programs augments revenue growth, driven by partnerships with major OEMs and compliance with European regulations.
  
• Cost-cutting initiatives enhance net margins, with manufacturing optimizations and corporate restructuring supporting improved earnings.
  
• Declining vehicle production and increased costs pose significant risks to revenue growth, profit margins, and cash flow sustainability for Stoneridge.

Catalysts

Designs and manufactures engineered electrical and electronic systems, components, and modules for the automotive, commercial, off-highway, and agricultural vehicle markets in North America, South America, Europe, Mexico, China, and internationally.

• The launch and expansion of the MirrorEye program with major OEMs such as Volvo and Daimler Truck are expected to drive significant future revenue growth, potentially adding more than $50 million to MirrorEye's revenue in 2025 alone, almost doubling it compared to last year.
  
• Stoneridge aims to improve net margins by reducing material and structural costs, evidenced by their ongoing manufacturing optimization project in Juarez, Mexico, which will streamline operations and is expected to result in annualized savings as it completes.
  
• The continued roll-out of SMART2 tachographs in response to European regulations will drive revenue growth as more vehicles are mandated to use these devices, particularly in OEM and aftermarket segments.
  
• Product expansion into trailer connectivity solutions, such as backup cameras and other advanced technologies that improve vehicle safety and efficiency, is poised to create new revenue streams and long-term growth opportunities in 2025 and beyond.
  
• Structural cost reductions, including delayering corporate functions and improving operational efficiencies, are expected to positively impact net margins and contribute towards improved earnings.

Stoneridge Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Stoneridge's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.8% today to 1.9% in 3 years time.
• Analysts expect earnings to reach $19.4 million (and earnings per share of $0.7) by about April 2028, up from $-16.5 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 26.5x on those 2028 earnings, up from -7.8x today. This future PE is greater than the current PE for the US Auto Components industry at 13.7x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.71%, as per the Simply Wall St company report.

Stoneridge Future Earnings Per Share Growth

Risks

• The decline in commercial vehicle production, particularly a 24% decrease in Europe, presents a significant risk to revenue growth for Stoneridge's MirrorEye product.
  
• Pressure from declining production volumes for North American passenger vehicles could negatively impact sales and profit margins for Stoneridge's Control Devices segment.
  
• Elevated warranty and other quality-related costs in the fourth quarter highlight potential ongoing operational risks that could further impact net margins.
  
• Continued macroeconomic challenges in South America have already led to a decrease in sales for Stoneridge Brazil, potentially impacting overall revenue and profit margins.
  
• Inventory reduction and cash flow improvements, while effective in the short term, may see limited additional gains moving forward, which could affect future free cash flow and working capital management.

Valuation

• The analysts have a consensus price target of $14.0 for Stoneridge 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 $16.0, and the most bearish reporting a price target of just $12.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $999.5 million, earnings will come to $19.4 million, and it would be trading on a PE ratio of 26.5x, assuming you use a discount rate of 10.7%.
• Given the current share price of $4.67, the analyst price target of $14.0 is 66.6% 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.