Capacity Expansions At Geneva And Salt Lake City May Improve Efficiency, But Rising Steel Prices And Tariffs Could Compress Margins

Key Takeaways

• Rising steel prices and tariffs in 2025 could boost SPP project pricing and lead to revenue growth.
  
• Expansion efforts and strategic M&A activities are expected to enhance production efficiency and drive long-term revenue growth.
  
• Depressed market conditions, rising steel prices, and ongoing interest rate hikes could compress margins and limit Northwest Pipe's earnings growth and profitability.

Catalysts

Engages in the manufacture and sale of water-related infrastructure products in North America and Canada.

• The expected rise in steel prices in 2025, supported by potential new tariffs, is likely to enable higher SPP project pricing, potentially leading to revenue growth.
  
• An increase in nonresidential Precast orders driven by a 19% growth in the Dodge Momentum Index and a 30% rise in the commercial sector activity suggests imminent revenue enhancement and potential gross margin improvement.
  
• Investments in product spread efforts and capacity expansion at the Geneva and Salt Lake City facilities are aimed at increasing production efficiency and driving revenue growth, subsequently enhancing net margins in 2026 onwards.
  
• The M&A strategy focusing on expanding precast-related capabilities and geographic reach is expected to accelerate revenue growth and improve production efficiencies, which could positively impact earnings in the mid-to-long term.
  
• Commitment to share repurchases in the absence of M&A opportunities suggests an intention to increase earnings per share, enhancing shareholder value.

Northwest Pipe Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Northwest Pipe's revenue will grow by 1.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.9% today to 6.6% in 3 years time.
• Analysts expect earnings to reach $34.1 million (and earnings per share of $3.29) by about March 2028, down from $34.2 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 18.9x on those 2028 earnings, up from 12.3x today. This future PE is lower than the current PE for the US Construction industry at 24.1x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.0%, as per the Simply Wall St company report.

Northwest Pipe Future Earnings Per Share Growth

Risks

• The depressed market conditions on the nonresidential side of Northwest Pipe's precast business are impacting volumes, which may result in lower revenues and profit margins if the trend continues.
  
• Rising steel prices in 2025 could increase production costs, and while higher prices are generally favorable, any inability to pass these costs onto customers may compress net margins.
  
• The ongoing impact of higher interest rates is negatively affecting nonresidential construction demand, leading to a margin compression in the precast business, which could persist and limit earnings growth.
  
• The company's exposure to tariffs, particularly the retroactive tariffs on foreign steel, has already impacted gross profit and may continue to impose additional costs, which could hinder profitability.
  
• Seasonal weather effects and unscheduled downtimes are expected to reduce SPP revenue in the first quarter of 2025, potentially limiting earnings in the early part of the year.

Valuation

• The analysts have a consensus price target of $57.0 for Northwest Pipe based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $515.4 million, earnings will come to $34.1 million, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 8.0%.
• Given the current share price of $42.25, the analyst price target of $57.0 is 25.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.