New APU And MRO Capabilities Will Expand Future Markets

Key Takeaways

• Launch of new capabilities and increased backlog position TAT Technologies for potential revenue growth in upcoming years.
  
• Expansion in trading, leasing, and strategic inventory buildup aims to enhance profitability and operational efficiency.
  
• Strategic inventory buildup and supply chain challenges may strain TAT's financial stability and affect revenue recognition, while increased tax liabilities and loan interest could impact profitability.

Catalysts

Provides solutions and services to the commercial and military aerospace and ground defense industries in the United States, Israel, and internationally.

• The launch of new capabilities, particularly the APUs 131 and 500, is opening TAT Technologies to substantial new markets, which could drive revenue growth in 2025.
  
• The expansion of trading and leasing capabilities allows TAT to utilize in-house MRO capabilities, overcoming supply chain challenges and increasing profitability margins.
  
• Strategic inventory buildup to support 2025 operations and growth could lead to improved revenue as materials and components will be readily available to meet demand.
  
• An increase in backlog and long-term agreements points to potential revenue growth in 2025 and 2026, as new contracts are booked and new business is won.
  
• Continued improvements in profitability and efficiency, such as gross and operating margins, suggest an emphasis on enhancing net margins and overall earnings.

TAT Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TAT Technologies's revenue will grow by 13.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.3% today to 9.7% in 3 years time.
• Analysts expect earnings to reach $21.3 million (and earnings per share of $1.85) by about April 2028, up from $11.2 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 26.8x on those 2028 earnings, up from 25.8x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 30.0x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.94%, as per the Simply Wall St company report.

TAT Technologies Future Earnings Per Share Growth

Risks

• The company's negative operational cash flow in 2024 due to strategic inventory buildup may strain its working capital, impacting overall net margins and financial stability if not managed properly.
  
• Supply chain challenges, particularly concerning OEM parts for engines and landing gear, persist with long lead times and unpredictable deliveries, potentially disrupting timely revenue recognition and affecting earnings.
  
• The company's reliance on strategic investments to maintain growth and profitability could lead to increased interest expenses given its $20 million in loans, negatively impacting net income.
  
• TAT Technologies may face increased tax liabilities in 2025 and start paying taxes from 2026, which could reduce net profit margins compared to previous years.
  
• As a newcomer in the APU market, TAT faces uncertainties and challenges in winning large contracts; success depends on securing smaller RFPs, which may limit significant revenue and earnings growth in the near term.

Valuation

• The analysts have a consensus price target of $35.0 for TAT Technologies 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 $220.1 million, earnings will come to $21.3 million, and it would be trading on a PE ratio of 26.8x, assuming you use a discount rate of 7.9%.
• Given the current share price of $26.32, the analyst price target of $35.0 is 24.8% 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.