Legacy Paper Decline Will Compress Margins As Defense Rises

Key Takeaways

• Structural declines in paper demand and overexposure to mature markets constrain Albany International's growth opportunities and recurring revenues.
  
• Regulatory pressures, supply chain localization, and aerospace dependence increase operating costs and earnings volatility, challenging future margin stability.
  
• Growth in defense, aerospace, and sustainable packaging, combined with operational improvements and proprietary technologies, positions Albany International for enhanced margins and long-term revenue stability.

Catalysts

Engages in the machine clothing and engineered composites businesses.

• Structural declines in global demand for printing and writing paper, accelerated by digital adoption and industry automation, continue to undermine long-term revenue prospects in Albany International's largest legacy segment, making future top-line growth challenging as revenue base contracts further.
  
• Overexposure to cyclical and mature papermaking markets poses an ongoing risk that cannot be offset by growth in other areas, limiting the company's ability to expand its customer base while recurring revenues from these segments are likely to deteriorate.
  
• Intensifying protectionism and supply chain localization, especially in Asia and North America, threaten the efficiency and cost advantage of Albany International's global operations, increasing the risk of supply disruptions and persistent upward pressure on production costs, which will compress operating margins over time.
  
• Stricter sustainability mandates and tightening environmental regulations across key markets demand higher investment in compliance and manufacturing upgrades, driving up capital expenditures and increasing the risk of margin erosion as Albany International may be forced to accelerate spending outpacing efficiency gains.
  
• Heavy reliance on major aerospace programs with concentrated customer exposure, combined with mounting risks of contract delays, cancellations, and cost overruns (as evidenced by repeated EAC adjustments and higher-than-expected labor costs in aerospace), introduces material earnings volatility and undermines the reliability of future profit expansion.

Albany International Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Albany International compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Albany International's revenue will grow by 2.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.3% today to 13.2% in 3 years time.
• The bearish analysts expect earnings to reach $170.9 million (and earnings per share of $5.77) by about August 2028, up from $62.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.8x on those 2028 earnings, down from 26.5x today. This future PE is lower than the current PE for the US Machinery industry at 22.7x.
• Analysts expect the number of shares outstanding to decline by 5.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.11%, as per the Simply Wall St company report.

Albany International Future Earnings Per Share Growth

Risks

• Accelerated growth in the defense sector, such as hypersonics and new programs like CH-53K and long-term contracts in commercial aerospace, is expected to drive higher-margin, recurring revenue growth for Albany International's Engineered Composites segment over the next several years, supporting overall earnings and top-line expansion.
  
• The long-term momentum in sustainable packaging and a global shift away from single-use plastics is expected to maintain strong demand for Albany's advanced engineered materials, especially in the Machine Clothing segment, which can bolster revenue and cushion any secular decline in traditional paper products.
  
• Ongoing operational optimization, facility consolidations, and successful ramp-ups in strategic programs are likely to improve operational efficiencies, leading to better net margins and profitability as temporary disruptions are resolved and synergies from business exits materialize.
  
• Strategic investments in proprietary technologies, such as 3D woven composite parts that can replace titanium in aerospace applications, position Albany International to capture market share in advanced manufacturing and benefit from industry secular trends favoring high-performance materials, which can drive steady long-term revenue growth.
  
• Geographic expansion in Europe and a strong order backlog, along with recovery in selected segments (such as tissue globally and deliveries in Europe), indicate resilient top-line performance and support management's confidence in reaffirming guidance, potentially resulting in higher revenue and improved earnings in the coming years.

Valuation

• The assumed bearish price target for Albany International is $55.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Albany International's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $79.0, and the most bearish reporting a price target of just $55.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.3 billion, earnings will come to $170.9 million, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $55.88, the bearish analyst price target of $55.0 is 1.6% lower. The relatively low difference between the current share price and the analyst bearish 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.