Expansion Into Growing Markets And Efficiency Drives Will Improve Future Prospects

Key Takeaways

• Expansion in growing markets and verticals could drive revenue growth through increased demand for water solutions.
  
• Productivity improvements via the Franklin Operating System may enhance net margins by reducing overhead and streamlining operations.
  
• The company faces challenges with declining sales, macroeconomic pressures, increased expenses, and lowered guidance, suggesting potential risks to revenue and earnings growth.

Catalysts

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

• Franklin Electric's focus on integrating recent acquisitions and launching new products, combined with increasing SG&A expenses, is expected to benefit future growth as these investments are anticipated to enhance revenue generation once costs normalize.
  
• The company's emphasis on productivity improvements and cost management, particularly through initiatives like the Franklin Operating System, is likely to help improve net margins over time by streamlining operations and reducing overhead.
  
• The strategic focus on addressing critical water needs in growing markets and expanding in faster-growing verticals could lead to increased revenue opportunities as demand for such products and solutions rises.
  
• Efforts to normalize inventory levels and improve cash flow suggest a potential positive impact on earnings by optimizing working capital and enhancing financial efficiency.
  
• The anticipated reduction in restructuring charges and SG&A costs in future periods, following one-time 2024 expenses, is expected to positively influence net income by reducing operating expenses and improving the bottom line.

Franklin Electric Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Franklin Electric's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.2% today to 10.5% in 3 years time.
• Analysts expect earnings to reach $236.9 million (and earnings per share of $5.21) by about December 2027, up from $184.5 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 23.8x on those 2027 earnings, down from 25.8x today. This future PE is greater than the current PE for the US Machinery industry at 23.6x.
• Analysts expect the number of shares outstanding to decline by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.81%, as per the Simply Wall St company report.

Franklin Electric Future Earnings Per Share Growth

Risks

• The company's third-quarter results were below expectations, with sales declining by 1% year-over-year, primarily due to lower volumes in the Fueling business and foreign currency impacts, which could put pressure on revenue growth.
  
• Sales in the Fueling Systems segment decreased by 10% compared to the previous year, partially due to labor constraints and interest rate pressures in capital investment decisions, which might negatively impact earnings.
  
• Macro trends, such as low housing starts, existing home sales, and unfavorable weather patterns, particularly in the U.S., were noted as challenges, likely affecting demand and revenue.
  
• Higher SG&A expenses, which include costs related to CEO transition and acquisitions, have significantly impacted the company's operating income and net margins.
  
• The company's full-year guidance has been lowered due to unanticipated sales reductions and normalized demand expectations, suggesting potential risks to overall earnings.

Valuation

• The analysts have a consensus price target of $103.0 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 $115.0, 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 2027, revenues will be $2.3 billion, earnings will come to $236.9 million, and it would be trading on a PE ratio of 23.8x, assuming you use a discount rate of 6.8%.
• Given the current share price of $103.99, the analyst's price target of $103.0 is 1.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.