Expansion Into Solar And Mega Projects Will Offset Competition But Margins Will Be Pressured

Key Takeaways

• Increased competition and import pressure may impact Atkore's pricing, margins, and revenue negatively in certain markets.
  
• Strategic growth initiatives and disciplined capital deployment aim to counter challenges and provide shareholder value.
  
• Atkore's strategic approach capitalizes on secular trends, diversified markets, and shareholder returns, while optimizing operations and maintaining financial flexibility for sustained growth.

Catalysts

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

• Atkore expects to face increased competition in the PVC conduit market with new domestic competitors entering, leading to potential pricing challenges and impacting future margins and revenue.
  
• The steel conduit business continues to face pressure from import competition, which could lead to ongoing pricing declines, negatively affecting margins and earnings.
  
• On a positive note, Atkore's strategic initiatives to grow in water-related markets and global megaprojects (such as data centers and chip manufacturing plants) offer potential volume growth, which could help offset some pricing and competitive pressures, positively impacting future revenue.
  
• Investments in expanding product offerings such as solar torque tubes and further leveraging existing construction services could help capture growth from mega projects and renewable energy trends, supporting future revenue growth.
  
• Despite current challenges, Atkore's disciplined capital deployment, including share buybacks and dividends, aims to provide shareholder value, but this focus on capital return could limit reinvestment into potentially higher-growth areas, affecting longer-term earnings growth potential.

Atkore Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Atkore's revenue will decrease by 0.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.6% today to 6.1% in 3 years time.
• Analysts expect earnings to reach $198.4 million (and earnings per share of $6.82) by about December 2027, down from $466.7 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 2027 earnings, up from 6.6x today. This future PE is lower than the current PE for the US Electrical industry at 24.1x.
• Analysts expect the number of shares outstanding to decline by 5.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.91%, as per the Simply Wall St company report.

Atkore Future Earnings Per Share Growth

Risks

• Atkore's ability to leverage secular trends such as renewable energy, grid hardening, and electrification could drive demand, potentially improving revenue and supporting long-term growth.
  
• The expansion of Atkore's product offerings into water-related end markets and mega projects, such as data centers and chip manufacturing, provides opportunities for increased volume growth and revenue diversification.
  
• Atkore's strategic capital deployment, including significant share repurchases and introduction of a quarterly dividend, demonstrates a commitment to returning capital to shareholders, which can improve investor confidence and support share price stability.
  
• The successful operation of new facilities, such as the Hobart plant for solar torque tubes and regional service centers, could optimize supply chain efficiencies and support margin improvement through enhanced customer service.
  
• Strong cash flow generation and a disciplined approach to M&A provide Atkore with the financial flexibility to invest in growth initiatives, potentially leading to sustained earnings growth.

Valuation

• The analysts have a consensus price target of $102.83 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 $115.0, and the most bearish reporting a price target of just $84.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.3 billion, earnings will come to $198.4 million, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 7.9%.
• Given the current share price of $88.69, the analyst's price target of $102.83 is 13.8% 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.