Expansion Into Smart Grid Solutions Will Strengthen Global Market Position

Key Takeaways

• Renaming and focusing on energy systems aims to drive growth through smart products and strategic revenue diversification across global markets.
  
• Strategic acquisitions and a strong M&A pipeline in high-growth areas are expected to enhance product offerings and improve revenue diversity and earnings.
  
• Challenging macroeconomic conditions, currency headwinds, and cost pressures threaten Franklin Electric's profitability, with significant declines in key product lines indicating potential revenue issues.

Catalysts

Designs, manufactures, and distributes water and fuel pumping systems worldwide.

• The renaming of the Fueling Systems segment to Energy Systems reflects the company's focus on energy-related products such as critical asset monitoring and grid solutions, which compose about 25% of the segment's revenues. This shift to smart products for utility, data center, and grid applications could drive revenue growth.
  
• Continued growth in international markets, particularly in Europe, Latin America, and APAC regions, which are less impacted by macroeconomic challenges in the U.S., is expected to foster revenue diversification and overall sales growth.
  
• Recent acquisitions, including a water systems business in Australia and a company in Latin America, are anticipated to enhance Franklin Electric’s product portfolio and market presence, potentially improving revenue and operating income.
  
• The company has a robust pipeline for future M&A activity, particularly in high-growth verticals, which could boost both revenue and earnings through expansion into new markets and product lines.
  
• Strategic investment in new products, capacity, and digital capabilities, supported by increased capital expenditures, aims to drive organic growth above market rates, likely contributing to better margins and higher earnings over time.

Franklin Electric Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Franklin Electric's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.9% today to 9.9% in 3 years time.
• Analysts expect earnings to reach $231.1 million (and earnings per share of $5.17) by about April 2028, up from $179.6 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 25.5x on those 2028 earnings, up from 21.5x today. This future PE is greater than the current PE for the US Machinery industry at 17.9x.
• Analysts expect the number of shares outstanding to decline by 0.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.11%, as per the Simply Wall St company report.

Franklin Electric Future Earnings Per Share Growth

Risks

• The challenging macroeconomic environment with high interest rates and slow housing market growth could lead to reduced demand for Franklin Electric's products, potentially impacting revenue.
  
• Foreign currency translation has been identified as a headwind, decreasing sales, which could continue to negatively affect net margins and earnings if not managed effectively.
  
• The 15% decrease in operating income due to higher SG&A and restructuring costs reflects a potential risk in maintaining profitability if costs are not controlled and restructuring does not yield expected efficiencies.
  
• The significant decline in large dewatering equipment sales in the Water Systems segment (down 36% year-over-year) indicates potential issues in this product line, affecting segment revenues and overall earnings.
  
• Commodity pricing pressure, as seen in the Distribution segment, and the potential for further tariffs could lead to reduced margins and affect earnings if cost management strategies do not offset these pressures.

Valuation

• The analysts have a consensus price target of $109.0 for Franklin Electric 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 $120.0, and the most bearish reporting a price target of just $90.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.3 billion, earnings will come to $231.1 million, and it would be trading on a PE ratio of 25.5x, assuming you use a discount rate of 7.1%.
• Given the current share price of $84.21, the analyst price target of $109.0 is 22.7% 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.