New Business Programs And Cost Reductions Will Optimize Operations

Key Takeaways

• Aggressive cost reduction and plant optimization strategies aim to improve margins and boost overall profitability.
  
• Financial restructuring and efficient resource utilization are expected to enhance cash flow and earnings by reducing costs and leveraging operational assets.
  
• Reliance on reshoring and business acquisition for growth faces unpredictability, affecting revenue and stability with significant execution and financial risks.

Catalysts

Designs, manufactures, and sells high-precision components and assemblies for various end markets in the United States, China, Brazil, Mexico, Germany, Poland, and internationally.

• NN Inc. has implemented a new business development program, already securing approximately $150 million in new business awards and launching 70 new business programs in 2025, which indicates potential for significant revenue growth.
  
• The company is aggressively pursuing a cost reduction strategy, aiming to reduce costs by 3% annually through plant footprint consolidation, shared operating teams, and continuous improvement programs. This is expected to increase net margins and profitability.
  
• NN Inc. is refreshing its balance sheet with new financing arrangements, including an asset-based lending (ABL) facility and a term loan refinancing process, which aims to reduce interest expenses and improve free cash flow, ultimately enhancing earnings.
  
• Restructuring efforts, including fixing or closing underperforming plants and optimizing operational footprints, are projected to make all facilities EBITDA positive and improve operational efficiency, positively impacting net margins.
  
• The company expects to leverage its installed asset base for new business launches, minimizing CapEx requirements. This efficient use of existing resources will improve earnings by enhancing operational leverage.

NN Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NN's revenue will grow by 2.8% annually over the next 3 years.
• Analysts are not forecasting that NN will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate NN's profit margin will increase from -11.6% to the average US Machinery industry of 9.1% in 3 years.
• If NN's profit margin were to converge on the industry average, you could expect earnings to reach $45.9 million (and earnings per share of $0.94) by about May 2028, up from $-54.0 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 9.8x on those 2028 earnings, up from -1.8x today. This future PE is lower than the current PE for the US Machinery industry at 21.3x.
• Analysts expect the number of shares outstanding to decline by 0.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

NN Future Earnings Per Share Growth

Risks

• NN's reliance on reshoring efforts and new business acquisition to drive growth may face unpredictability, which could impact revenue stability if these initiatives do not achieve their targets.
  
• The closure and consolidation of facilities could encounter operational challenges, potentially affecting cost savings and impacting operating margins if not executed smoothly.
  
• NN's exposure to tariffs, particularly within the automotive sector, could impact demand and lead to volatile revenue streams due to potential price increases for customers.
  
• The company's need to achieve a 20% long-term gross margin requires improved execution and significant operational improvements, particularly in underperforming facilities, which presents an execution risk.
  
• High levels of debt and ongoing refinancing activities suggest financial risk, particularly concerning interest costs and liquidity management, which could affect net earnings if not managed effectively.

Valuation

• The analysts have a consensus price target of $6.667 for NN 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 $7.0, and the most bearish reporting a price target of just $6.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $504.8 million, earnings will come to $45.9 million, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 11.4%.
• Given the current share price of $1.9, the analyst price target of $6.67 is 71.5% 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.