R454B Equipment And Alpha Heat Pump Will Boost Production Efficiency

Key Takeaways

• Strong backlog and operational improvements in production efficiency suggest potential for sustained revenue growth and margin expansion.
  
• New refrigerant production, key product introductions, and facility expansions drive potential market share growth and enhanced operational efficiency.
  
• Supply chain and macroeconomic issues, alongside debt pressure and customer dependence, challenge AAON's revenue and earnings stability and growth prospects.

Catalysts

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

• The transition to production with the new R454B refrigerant equipment presents a future opportunity to increase production rates as supply chain issues abate, potentially driving higher revenue and improved margins.
  
• The strong backlog reported, reaching a record level of $1 billion, indicates robust demand across both AAON and BasX branded products, which is likely to contribute to sustained revenue growth.
  
• Operational efficiency improvements at the BasX and AAON Coil Products segments are expected to lead to further margin expansion, particularly as new facility expansions come online, positively impacting net margins.
  
• The introduction of the next generation Alpha Class heat pump, operable down to negative 20 degrees Fahrenheit, and expected market share gains with national accounts, suggest potential for revenue growth and gross margin improvements.
  
• Ongoing investments in capacity expansion and rightsizing, particularly at the new Memphis site, are anticipated to support higher production volumes and revenue growth while potentially enhancing operational efficiency and net margins over time.

AAON Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AAON's revenue will grow by 16.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.6% today to 15.5% in 3 years time.
• Analysts expect earnings to reach $308.8 million (and earnings per share of $3.57) by about May 2028, up from $158.8 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 35.0x on those 2028 earnings, down from 49.9x today. This future PE is greater than the current PE for the US Building industry at 19.9x.
• Analysts expect the number of shares outstanding to decline by 1.03% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.56%, as per the Simply Wall St company report.

AAON Future Earnings Per Share Growth

Risks

• AAON's supply chain issues, particularly with components related to the transition to the new R454B refrigerant, have impacted production volumes, which could continue to affect future revenue and earnings.
  
• The company's gross margin has contracted significantly due to lower production volumes and operating deleverage, especially at the AAON Oklahoma segment, impacting net margins and earnings.
  
• There are concerns about macroeconomic uncertainties impacting booking rates and market conditions, which could affect AAON's ability to achieve projected growth in revenue and earnings.
  
• The significant increase in debt, used to finance working capital and capital expenditures, could pressure cash flow and net margins if earnings do not increase at an expected rate.
  
• While the BasX segment has driven recent growth, reliance on orders from a few large customers increases risk; any disruption in their demand could negatively impact revenue and earnings stability.

Valuation

• The analysts have a consensus price target of $111.25 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 $100.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.0 billion, earnings will come to $308.8 million, and it would be trading on a PE ratio of 35.0x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $97.44, the analyst price target of $111.25 is 12.4% 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.