Filtration Firm To Expand Into Industrial Markets And Improve Efficiency After Transition

Key Takeaways

• Completion of its transition from Cummins allows Atmus Filtration Technologies to focus on growth and improve operational efficiencies, potentially bolstering net margins.
  
• Expanding market share, enhancing supply chain, and pursuing acquisitions and product launches position Atmus for long-term revenue and profit growth.
  
• Market challenges and high transition costs may constrain Atmus's profitability, while acquisitions could strain financial resources and impact future margins.

Catalysts

Designs, manufactures, and sells filtration products under the Fleetguard brand name in North America, Europe, South America, Asia, Australia, Africa, and internationally.

• The transition from being part of Cummins to a stand-alone company is nearly complete, which is expected to allow Atmus Filtration Technologies to focus more on growth initiatives and potentially improve operational efficiencies, likely impacting net margins positively.
  
• The company is seeing outperformance in market share gains despite industry headwinds, and it is executing a growth strategy that includes expanding new business wins, which could drive future revenue growth.
  
• The transformation of the supply chain to a more dedicated network is enhancing operational efficiency and improving product availability, which may contribute to higher net margins by reducing costs and increasing customer satisfaction.
  
• Plans for expansion into industrial filtration markets through inorganic acquisitions and new product launches in organic growth efforts could position Atmus for additional revenue streams and profit expansion in the future.
  
• The company is executing share repurchases and dividends as part of its capital allocation strategy, which could potentially lead to higher earnings per share (EPS) as share count decreases.

Atmus Filtration Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Atmus Filtration Technologies's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.8% today to 13.5% in 3 years time.
• Analysts expect earnings to reach $253.0 million (and earnings per share of $3.05) by about December 2027, up from $180.3 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 18.7x on those 2027 earnings, up from 18.4x today. This future PE is lower than the current PE for the US Machinery industry at 23.6x.
• Analysts expect the number of shares outstanding to decline by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.15%, as per the Simply Wall St company report.

Atmus Filtration Technologies Future Earnings Per Share Growth

Risks

• Continued softness in the aftermarket and weakening first-fit markets could limit revenue growth opportunities for Atmus, impacting overall profitability.
  
• Market declines in key regions like India and China present challenges, potentially affecting global sales and net margins due to reduced demand.
  
• The ongoing transition from Cummins and stand-alone separation costs are higher than anticipated, leading to increased expenses and potentially affecting net earnings.
  
• Achieving growth through acquisitions in industrial filtration may be uncertain and could strain financial resources if acquisition costs are high, impacting future net margins.
  
• Lower selling days in the fourth quarter and continued declines in the heavy-duty first-fit market could negatively affect fourth-quarter revenue and profit margins.

Valuation

• The analysts have a consensus price target of $46.86 for Atmus Filtration Technologies 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 $51.0, and the most bearish reporting a price target of just $39.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.9 billion, earnings will come to $253.0 million, and it would be trading on a PE ratio of 18.7x, assuming you use a discount rate of 7.2%.
• Given the current share price of $39.94, the analyst's price target of $46.86 is 14.8% 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.