Expansion In Water Products And Construction Services Aims To Impact Future Earnings Amid Competitive Pressures

Key Takeaways

• Initiatives in water and global construction aim to boost future revenue and support PVC and HDPE products through growth in mega projects and pipeline backlog.
  
• Cost structure evaluation and potential Mexican import tariffs could improve net margins, while core market expansions bolster revenue from large-scale projects.
  
• Increased import competition and pricing pressures threaten Atkore's revenue, net margins, and sales, alongside higher tax rates and downstream market constraints.

Catalysts

Engages in the manufacture and sale of electrical, mechanical, safety, and infrastructure products and solutions in the United States and internationally.

• The company is focusing on growth initiatives related to water and global construction services, which are expected to support both PVC and HDPE water products later in the year. This could positively impact future revenue.
  
• Atkore is pursuing opportunities for global mega projects to grow its pipeline and backlog, potentially increasing future revenue and earnings.
  
• The company plans to mitigate industry headwinds by examining enterprise-wide cost structures, which could help maintain or slightly improve net margins.
  
• A proposed tariff on imports from Mexico could positively impact the business, as the outlook does not currently account for the potential benefits, suggesting an upside to net margins and earnings if implemented.
  
• Atkore continues to expand its core markets, such as metal framing and construction services, expected to benefit revenue growth via increased capacity for large construction projects, including data centers and chip fab manufacturing facilities.

Atkore Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Atkore's revenue will decrease by 1.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.3% today to 3.9% in 3 years time.
• Analysts expect earnings to reach $114.2 million (and earnings per share of $5.61) by about March 2028, down from $376.2 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 25.4x on those 2028 earnings, up from 6.1x today. This future PE is greater than the current PE for the US Electrical industry at 25.0x.
• Analysts expect the number of shares outstanding to decline by 5.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.77%, as per the Simply Wall St company report.

Atkore Future Earnings Per Share Growth

Risks

• Increased import competition, particularly for PVC and steel conduit, could drive down prices and impact Atkore's revenue and net margins.
  
• Declines in organic volume and average selling prices, especially a 12% decrease in selling prices for key products, suggest potential challenges in maintaining or increasing revenue.
  
• Unanticipated rises in tax rate from 17.5% to 21%, coupled with fewer stock compensation benefits, may strain net earnings.
  
• Downstream constraints in key markets, such as the utility scale solar market, are leading to lower volumes, affecting overall sales projections.
  
• Significant pressure on pricing due to market disruptions, aggressive import growth, and competitive new entries threatens EBITDA margins and ROI on strategic assets.

Valuation

• The analysts have a consensus price target of $77.667 for Atkore 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 $90.0, and the most bearish reporting a price target of just $65.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.9 billion, earnings will come to $114.2 million, and it would be trading on a PE ratio of 25.4x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of $65.55, the analyst price target of $77.67 is 15.6% 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.