AI Power Demand And Carbon Capture Will Drive Major Long Term Upside

Catalysts

About Babcock & Wilcox Enterprises

Babcock & Wilcox Enterprises provides advanced energy and environmental technologies, services and equipment for power and industrial customers worldwide.

What are the underlying business or industry changes driving this perspective?

• Surging power demand from AI factories and hyperscale data centers is creating multi gigawatt opportunities such as the Applied Digital project. If fully executed and replicated across the $3 billion to $5 billion AI pipeline, this can materially accelerate revenue growth and lift long term earnings power through large, multi year contracts.
• North American baseload generation needs are rising as industrial and utility customers seek reliable capacity. This directly supports record Global Parts & Services bookings and backlog, improving visibility for double digit revenue growth and structurally higher net margins from high mix aftermarket work.
• Proven, repeatable boiler designs and the ability to deploy them faster than competing combined cycle options provide a cost and speed advantage in securing new-build projects. This should translate into higher win rates, stronger backlog conversion and expanding operating margins as engineering and execution risk remain low.
• Commercial advances in BrightLoop for low cost hydrogen and steam, along with growing customer interest, position B&W to participate in the shift toward cleaner fuels. This opens new high value projects that can diversify revenue and support margin expansion as these solutions scale.
• Increasing adoption of carbon capture and monetization of carbon credits in waste to energy and coal to energy applications, including potential SolveBright projects in the $70 million to $100 million range, can create incremental, higher margin revenue streams that enhance EBITDA and support a richer earnings multiple over time.

Assumptions

This narrative explores a more optimistic perspective on Babcock & Wilcox Enterprises compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Babcock & Wilcox Enterprises's revenue will grow by 6.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -9.3% today to 5.7% in 3 years time.
• The bullish analysts expect earnings to reach $50.3 million (and earnings per share of $0.44) by about December 2028, up from $-66.8 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $-7.8 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 37.4x on those 2028 earnings, up from -9.9x today. This future PE is greater than the current PE for the US Electrical industry at 31.6x.
• The bullish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.32%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The bullish view assumes sustained AI driven power demand, but the $1.5 billion Applied Digital project and the wider $3 billion to $5 billion AI pipeline are still at a limited notice to proceed stage and subject to final site selection, full notice to proceed and customer commitment, so any delay, downsizing or cancellation as AI architectures evolve or hyperscalers shift toward alternative generation options could materially reduce the expected uplift in backlog, revenue growth and long term earnings.
• Management highlights a $10 billion to $12 billion global pipeline including AI data centers, gas conversions and ClimateBright and BrightLoop projects, yet the current quarter shows only $149 million of revenue roughly flat year over year, which suggests a long conversion cycle and execution risk, so if a meaningful portion of the pipeline never converts or converts on weaker commercial terms than anticipated, the company may fall short of its targeted step up to $70 million to $85 million of adjusted EBITDA in 2026 and limit margin expansion.
• The strategy to reduce leverage relies heavily on divesting noncore assets, repeated equity raises including a recent $65 million issue and opportunistic use of the at the market program, which dilutes existing shareholders and signals continued dependence on external capital, so if equity markets weaken or the share price underperforms, Babcock & Wilcox may be forced to slow deleveraging or accept more expensive financing, pressuring net income and constraining future earnings growth.
• Long term growth in Global Parts & Services and the large natural gas boiler projects is tied to fossil fuel based baseload generation, while structural policy and customer pressure are pushing utilities and hyperscalers toward lower carbon or renewable solutions and carbon capture remains at the FEED study and early project stage, so if decarbonization accelerates faster than Babcock & Wilcox can commercialize BrightLoop and ClimateBright at scale, demand for traditional boiler and fossil fuel services could erode, weighing on revenue and compressing operating and net margins.
• Despite improved operating income and adjusted EBITDA, the company still reported a loss from continuing operations of $2.3 million in the quarter and carries pro forma net debt of about $113.2 million targeting 0.8 to 1.6 times 2026 EBITDA, which leaves limited room for cost overruns, schedule slippage or pricing pressure on large fixed price contracts, so any execution missteps on multi year projects or underperformance in the core business could quickly reverse margin gains and drag down earnings and cash flow.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Babcock & Wilcox Enterprises is $10.0, which represents up to two standard deviations above the consensus price target of $8.33. This valuation is based on what can be assumed as the expectations of Babcock & Wilcox Enterprises's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $10.0, and the most bearish reporting a price target of just $6.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $876.4 million, earnings will come to $50.3 million, and it would be trading on a PE ratio of 37.4x, assuming you use a discount rate of 11.3%.
  
• Given the current share price of $5.95, the analyst price target of $10.0 is 40.5% 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.