Calculated Acquisitions And Operational Efficiencies Set The Stage For Dynamic Growth

Key Takeaways

• Arcosa's strategic acquisitions and divestitures aim to boost revenue and profitability while enhancing financial flexibility and reducing net leverage.
  
• Strong performances in key segments and a robust order backlog position Arcosa for sustained revenue and earnings growth.
  
• Election uncertainty, housing market recovery, interest rate volatility, and underinvestment in barge fleet pose risks to Arcosa's revenue and margins.

Catalysts

Provides infrastructure-related products and solutions for the construction, engineered structures, and transportation markets in the United States.

• Arcosa's acquisition of Stavola, which expands its aggregates footprint and increases exposure to lower volatility infrastructure markets, is expected to drive significant revenue growth and margin expansion.
  
• The strategic transformation, including divestitures and acquisitions like Stavola and Ameron, has led to an increase in adjusted EBITDA guidance for 2024, suggesting enhanced profitability and earnings growth.
  
• Arcosa's continued focus on reducing net leverage to a target range of 2x to 2.5x over the next 18 months, while supporting growth initiatives, is expected to improve financial flexibility and potentially increase net margins.
  
• The performance improvements in Arcosa's Construction Products and Engineered Structures segments, driven by organic growth and operational efficiencies, are anticipated to lead to higher revenue and margin sustainability.
  
• Arcosa's order backlog for utility structures and barge businesses provides visibility into future demand, positioning the company for potential revenue and earnings growth in 2025 and beyond.

Arcosa Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arcosa's revenue will grow by 11.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.2% today to 9.8% in 3 years time.
• Analysts expect earnings to reach $339.2 million (and earnings per share of $6.82) by about November 2027, up from $128.1 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 19.6x on those 2027 earnings, down from 40.0x today. This future PE is lower than the current PE for the US Construction industry at 34.7x.
• Analysts expect the number of shares outstanding to grow by 0.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.38%, as per the Simply Wall St company report.

Arcosa Future Earnings Per Share Growth

Risks

• Delay in infrastructure spending due to U.S. election uncertainty could impact organic volume growth, potentially affecting revenue projections for Arcosa's Construction Products segment.
  
• Slower recovery in single and multifamily housing construction in the U.S. may lead to reduced demand in Arcosa's aggregates business, impacting revenue and net margins.
  
• Interest rate volatility and higher net interest expenses due to recent acquisitions may affect Arcosa's earnings and cash flow in the near term.
  
• Significant underinvestment in the aging barge fleet could lead to capacity constraints, affecting future revenue potential and net margins in Arcosa's Transportation Products segment.
  
• The seasonal nature of Stavola's revenue contributions may lead to variability in earnings, particularly in the first quarter, posing a risk to consistent financial performance.

Valuation

• The analysts have a consensus price target of $109.67 for Arcosa 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 2027, revenues will be $3.5 billion, earnings will come to $339.2 million, and it would be trading on a PE ratio of 19.6x, assuming you use a discount rate of 7.4%.
• Given the current share price of $104.95, the analyst's price target of $109.67 is 4.3% higher. 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.