Simplify To Accelerate NOW And Defense Opportunities Will Drive Future Success

Key Takeaways

• Simplify to Accelerate NOW initiative and machining expansion aim to improve operational efficiency and profitability through cost savings and earnings growth.
  
• High-growth defense sector and power quality demand offer substantial revenue opportunities, supported by end-market alignment and munitions demand.
  
• Economic uncertainties, high inventory levels, and significant debt could lead to inefficiencies, increased costs, and dampened revenue and earnings growth for Allient.

Catalysts

Designs, manufactures, and sells precision and specialty controlled motion components and systems for various industries in the United States, Canada, South America, Europe, and Asia-Pacific.

• Allient's Simplify to Accelerate NOW initiative is expected to drive $6 million to $7 million in additional annual savings by further optimizing operations, which could improve net margins and overall profitability.
  
• Expansion of machining capabilities at the Dothan facility is anticipated to enhance operational efficiency and cost structure, potentially leading to increased earnings as initial benefits are expected by late 2025.
  
• New opportunities in the high-growth defense sector, supported by the Allient Defense Solutions unit, could contribute significantly to future revenue growth, especially given increased demand for munitions and defense programs.
  
• The industrial sector is expected to rebound from inventory destocking by mid-2025, potentially stabilizing order flows and supporting revenue recovery.
  
• Strength in power quality demand, driven by macro trends such as data center expansion, is poised to boost sales and revenue as Allient focuses on strategically aligning with high-growth end markets.

Allient Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Allient's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 5.6% in 3 years time.
• Analysts expect earnings to reach $32.1 million (and earnings per share of $1.89) by about March 2028, up from $13.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.5x on those 2028 earnings, down from 30.3x today. This future PE is lower than the current PE for the US Electrical industry at 23.3x.
• Analysts expect the number of shares outstanding to grow by 0.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.34%, as per the Simply Wall St company report.

Allient Future Earnings Per Share Growth

Risks

• High inventory levels and extended supplier lead times could lead to inefficiencies and increased costs, impacting net margins.
  
• Sluggish recovery of the industrial automation and vehicle markets, including the powersports segment, may dampen revenue growth in the short term.
  
• Economic uncertainties in Europe, particularly in Germany, could dampen demand for Allient's products, affecting revenue projections.
  
• Fluctuations in foreign currency exchange rates and tariffs could increase costs of goods sold, negatively impacting gross margins.
  
• The significant debt level following the SNC acquisition could strain financial flexibility and limit cash available for growth initiatives, affecting earnings.

Valuation

• The analysts have a consensus price target of $31.0 for Allient 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 $35.0, and the most bearish reporting a price target of just $28.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $576.6 million, earnings will come to $32.1 million, and it would be trading on a PE ratio of 21.5x, assuming you use a discount rate of 9.3%.
• Given the current share price of $23.66, the analyst price target of $31.0 is 23.7% 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.