Acquiring Hog Technologies Will Expand Reach Into Infrastructure And Airport Markets

Key Takeaways

• Federal Signal's growth strategy, involving acquisitions and market expansion, aims to enhance revenue in infrastructure and airport markets both domestically and internationally.
  
• Operational efficiency, synergy from strategic acquisitions, and product development investments promise margin expansion and sustainable earnings growth.
  
• Extended lead times and potential tariff increases could erode market share and margins, while changes in government funding may impact revenue stability.

Catalysts

Designs, manufactures, and supplies a suite of products and integrated solutions for municipal, governmental, industrial, and commercial customers in the United States, Canada, Europe, and internationally.

• Federal Signal is strategically positioning itself for growth with the acquisition of Hog Technologies, which expands its reach into road-marking and line removal, targeting infrastructure and airport markets, both in the U.S. and internationally. This is expected to contribute positively to future revenue and is anticipated to operate within margin targets by 2026.
  
• The company's focus on increasing production rates for products with extended lead times, such as sewer cleaners and street sweepers, is aimed at improving revenue capture and reducing order backlog over time.
  
• Federal Signal is leveraging its strong financial position to pursue organic growth and additional strategic acquisitions, which are expected to bolster earnings and offer synergy opportunities within its existing business lines.
  
• The company's efforts to improve operational efficiency through the Federal Signal operational system and by optimizing supply chains are expected to lead to margin expansion and enhance earnings.
  
• The active M&A pipeline and continued investment in new product development are indicative of Federal Signal's strategy to drive sustainable revenue growth and earnings through market expansion and innovation.

Federal Signal Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Federal Signal's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.6% today to 12.2% in 3 years time.
• Analysts expect earnings to reach $287.6 million (and earnings per share of $4.6) by about March 2028, up from $216.3 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 27.2x on those 2028 earnings, up from 21.9x today. This future PE is greater than the current PE for the US Machinery industry at 21.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.25%, as per the Simply Wall St company report.

Federal Signal Future Earnings Per Share Growth

Risks

• Extended lead times for key products like street sweepers and sewer cleaners could lead to potential loss of market share if customers opt for competitors with shorter delivery times, affecting future revenues.
  
• A potential increase in tariffs on international supply sources could lead to higher costs that may not be fully passed on to customers, eroding net margins.
  
• Transitioning dealer territories and potential disruption in distribution channels could cause temporary drops in sales volumes and revenue.
  
• Publicly funded projects are crucial for many of the company’s markets, and any changes in government budgets or funding mechanisms may affect sales and overall revenue predictability.
  
• The expected increase in the effective tax rate from 18% in 2024 to approximately 26% in 2025 could lower net earnings compared to previous years.

Valuation

• The analysts have a consensus price target of $104.0 for Federal Signal 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 $82.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.4 billion, earnings will come to $287.6 million, and it would be trading on a PE ratio of 27.2x, assuming you use a discount rate of 7.2%.
• Given the current share price of $77.53, the analyst price target of $104.0 is 25.5% 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.