Reshoring And Integration In Display And Lighting Will Improve Efficiency

Key Takeaways

• Strategic onshoring and reshoring may reduce trade costs and improve margins, differentiating LSI Industries from competitors.
  
• Integration of acquisitions and cross-segment opportunities are expected to enhance future revenues and earnings.
  
• Inefficiencies, scheduling disruptions, and external risks may hinder earnings growth and margin stability, with additional challenges in lighting sales and acquisition integration.

Catalysts

Manufactures and distributes commercial lighting, graphics, and display solutions across strategic vertical markets.

• Sales in the Display Solutions segment increased by 70% year-over-year, driven by ongoing growth in the grocery and petroleum c-store markets, suggesting a continuation of strong revenue growth.
  
• The company's strategic move to onshore and reshore manufacturing and sourcing activities may lower exposure to trade and tariff-related costs compared to competitors, potentially improving future net margins.
  
• Cross-selling opportunities between the Display Solutions and Lighting segments, as well as the integration of recent acquisitions, are expected to enhance revenues and improve overall earnings.
  
• Recent acquisitions like Canada's Best Store Fixtures and the ongoing integration and performance of EMI are anticipated to drive revenue and margin improvements, reflecting stronger earnings in future periods.
  
• The book-to-bill ratio for the Lighting segment being above 1.13x and an 18% increase in backlog indicate strong demand and potential revenue growth, with future large project activities expected to bolster overall earnings.

LSI Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LSI Industries's revenue will grow by 7.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 7.1% in 3 years time.
• Analysts expect earnings to reach $48.8 million (and earnings per share of $1.58) by about May 2028, up from $21.9 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 23.4x on those 2028 earnings, up from 20.0x today. This future PE is greater than the current PE for the US Electrical industry at 22.8x.
• Analysts expect the number of shares outstanding to grow by 6.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.88%, as per the Simply Wall St company report.

LSI Industries Future Earnings Per Share Growth

Risks

• Manufacturing and logistics inefficiencies led to margin impacts due to fluctuating customer demand schedules, potentially affecting net margins and profitability.
  
• Lighting sales lagged due to a slowdown in large project activities and construction delays, which could dampen revenue growth despite a current backlog.
  
• The company faces ongoing scheduling disruptions in the Display Solutions segment, leading to lower margins and potential negative impacts on future earnings if not stabilized.
  
• There are risks associated with tariffs and trade wars, which may lead to increased costs and pricing adjustments, potentially impacting net margins and revenue stability.
  
• Strong acquisition and integration activities come with the risk of not achieving anticipated synergies or overcoming operational challenges, potentially affecting long-term earnings and growth projections.

Valuation

• The analysts have a consensus price target of $26.0 for LSI Industries 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 $30.0, and the most bearish reporting a price target of just $22.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $687.0 million, earnings will come to $48.8 million, and it would be trading on a PE ratio of 23.4x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $15.18, the analyst price target of $26.0 is 41.6% 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.