BASX Brand Will Lead Future Expansion With Data Center Cooling Solutions

Key Takeaways

• Strategic focus on data center market and BASX brand's custom solutions drive significant anticipated revenue and backlog growth.
  
• Heavy investment in capacity expansion and innovation in cooling solutions aims for robust long-term growth and improved margins.
  
• Disruptions from refrigerant transition and new facility costs may pressure AAON's margins, while inefficiencies and market uncertainties impact revenue and profit prospects.

Catalysts

Engages in engineering, manufacturing, marketing, and selling air conditioning and heating equipment in the United States and Canada.

• The BASX brand is experiencing robust demand, particularly in the data center market, driven by its custom-designed liquid cooling solutions. This is expected to significantly enhance AAON's revenue growth, as data center bookings were up approximately 100%, contributing to a 70% increase in the company's total backlog, which is anticipated to largely convert into revenue in 2025.
  
• The company anticipates substantial growth in its data center equipment business, projecting revenue growth from approximately $200 million to over $1 billion within a few years. This strategic focus is expected to be a major driver of increased revenue and earnings.
  
• AAON is investing heavily in expanding capacity and operational efficiency, such as the Memphis facility, which is expected to start production later in 2025. This expansion will support future revenue growth and help improve net margins as production scales up.
  
• The transition to new refrigerant 454B is initially causing a temporary slowdown but is expected to result in a steeper recovery, indicating potential future revenue growth and improved operational efficiency once the market stabilizes.
  
• The company's strategic reorganization and focus on innovation in semi-custom solutions, like data center cooling and cold-climate heat pumps, aim to drive sustainable and robust organic growth, positively impacting revenue, net margins, and earnings over the long term.

AAON Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AAON's revenue will grow by 15.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.0% today to 15.3% in 3 years time.
• Analysts expect earnings to reach $283.2 million (and earnings per share of $3.41) by about March 2028, up from $168.6 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 38.2x on those 2028 earnings, down from 38.6x today. This future PE is greater than the current PE for the US Building industry at 19.8x.
• Analysts expect the number of shares outstanding to decline by 0.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.65%, as per the Simply Wall St company report.

AAON Future Earnings Per Share Growth

Risks

• The refrigerant transition has caused disruptions and a temporary downturn in demand for the AAON brand, which may lead to lower production volumes and negatively impact revenue and profits in the short term.
  
• The AAON Oklahoma segment faced a significant decline in sales, which, coupled with the timing of the refrigerant transition, suggests challenges in production planning and maintaining net margins.
  
• Incremental fixed costs from the new Memphis facility, especially during its initial ramp-up phase with minimal revenue offset, could pressure profit margins and earnings, particularly in 2025.
  
• Uncertainties in the nonresidential construction market and potential macroeconomic headwinds could result in softer demand for AAON's products, impacting future revenue growth.
  
• Operational inefficiencies and limited capacity at the BASX Oregon facility have led to decreased margins, raising concerns about whether targeted margin recovery can be achieved, potentially affecting overall earnings.

Valuation

• The analysts have a consensus price target of $109.8 for AAON 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 $125.0, and the most bearish reporting a price target of just $96.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.8 billion, earnings will come to $283.2 million, and it would be trading on a PE ratio of 38.2x, assuming you use a discount rate of 7.6%.
• Given the current share price of $79.8, the analyst price target of $109.8 is 27.3% 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.