European OEM Partnerships And Latin America Expansion Will Drive Future Opportunities

Key Takeaways

• Strategic partnerships and innovative technologies in Europe can increase market share and revenue for Atmus.
  
• Expansion in high-growth markets and pursuing acquisitions may enhance margins, earnings, and market entry.
  
• Enduring soft market conditions, foreign exchange rates, and rising costs in steel, labor, and tariffs may constrain revenue and margins, with slow M&A progress posing additional growth risks.

Catalysts

Designs, manufactures, and sells filtration products under the Fleetguard brand in the United States and internationally.

• Atmus has substantial potential to increase its market share through new partnerships, particularly with OEMs in Europe, utilizing innovative technologies like the NanoNet N3, which will likely lead to increased revenue opportunities.
  
• The company is focusing on accelerating its growth in the aftermarket sector, especially in high-growth geographies like Latin America, which could enhance net margins and revenue by capitalizing on market outperformance.
  
• The ongoing transformation and independence from Cummins have created a strong opportunity for operational efficiency, as seen by the improved adjusted EBITDA margins, which should provide a more beneficial cost basis going forward.
  
• Atmus is actively pursuing inorganic growth opportunities through acquisitions in the industrial filtration market; successful acquisitions could significantly boost earnings by opening up new markets.
  
• A flexible capital return strategy, including significant share repurchases and maintaining a consistent dividend, alongside a strong balance sheet, positions Atmus to enhance earnings per share (EPS), thus potentially improving stock valuation.

Atmus Filtration Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Atmus Filtration Technologies's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.1% today to 13.2% in 3 years time.
• Analysts expect earnings to reach $246.0 million (and earnings per share of $2.96) by about April 2028, up from $185.6 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 16.2x on those 2028 earnings, up from 15.3x today. This future PE is lower than the current PE for the US Machinery industry at 21.3x.
• Analysts expect the number of shares outstanding to decline by 0.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.54%, as per the Simply Wall St company report.

Atmus Filtration Technologies Future Earnings Per Share Growth

Risks

• The company anticipates enduring soft end-market conditions in both aftermarket and first-fit markets, with potential revenue growth only expected to be flat to up 4%, potentially limiting overall revenue performance.
  
• A significant headwind from foreign exchange rates is expected, which may negatively impact both top-line revenue and bottom-line margins if conditions persist.
  
• Potential headwinds from input costs, particularly in steel and labor costs, may impact margins, as the company operates on a pricing lag, potentially affecting net margins until mid-year adjustments can be made.
  
• Pressure from tariffs, particularly on their Mexican manufacturing operations supplying the U.S. market, could necessitate price increases that might not be fully absorbed by the market, impacting revenue and margins.
  
• The strategic reliance on M&A for growth in the industrial filtration market has been slow due to challenges in finding suitable acquisitions that fit both strategic and scalability goals, posing risks to potential revenue growth from this initiative.

Valuation

• The analysts have a consensus price target of $39.571 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 $42.0, and the most bearish reporting a price target of just $35.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.9 billion, earnings will come to $246.0 million, and it would be trading on a PE ratio of 16.2x, assuming you use a discount rate of 7.5%.
• Given the current share price of $34.43, the analyst price target of $39.57 is 13.0% 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.