Reshoring And Cost Pressures Will Weaken Margins Despite Order Wins

Key Takeaways

• Shifting manufacturing trends and sustainability demands threaten Hillenbrand's equipment relevance, pressuring revenue growth, margins, and requiring significant innovation investment.
  
• High reliance on acquisitions and lagging digitalization create financial risks and margin pressure, potentially undermining earnings consistency and competitive positioning.
  
• Strong core business momentum, strategic divestitures, and regional manufacturing initiatives are driving margin expansion, growth opportunities, and resilience against global market uncertainties.

Catalysts

Operates as an industrial company in the United States and internationally.

• Accelerating localization and reshoring of manufacturing could erode Hillenbrand's global capital equipment sales, especially as emerging markets increasingly opt for domestic suppliers, leading to structurally weaker revenue growth over the coming years.
  
• Regulatory and customer adoption of circular economy practices, combined with evolving sustainability mandates, risk making Hillenbrand's legacy plastics and traditional materials equipment less relevant or in need of extensive innovation investment, thereby pressuring both market share and net margins.
  
• Ongoing reliance on acquisition-driven expansion exposes Hillenbrand to elevated leverage risk-highlighted by current net leverage near 3.7 times EBITDA-and heightens the probability of future integration issues and potential goodwill impairments, which could further dampen earnings stability.
  
• Intensifying digitalization and the need for more sophisticated automation may leave Hillenbrand at a technological disadvantage if competitors more nimbly adapt, undermining the company's ability to command premium pricing and thus compressing future operating margins.
  
• Continued volatility in commodity input costs, paired with limited pricing power in a competitive environment, increases the likelihood of persistent gross margin compression and prevents a sustainable recovery in profitability or cash flow.

Hillenbrand Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Hillenbrand compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Hillenbrand's revenue will decrease by 6.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.7% today to 8.5% in 3 years time.
• The bearish analysts expect earnings to reach $198.3 million (and earnings per share of $3.12) by about September 2028, up from $-20.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.6x on those 2028 earnings, up from -88.6x today. This future PE is lower than the current PE for the US Machinery industry at 24.0x.
• Analysts expect the number of shares outstanding to grow by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.49%, as per the Simply Wall St company report.

Hillenbrand Future Earnings Per Share Growth

Risks

• The company is seeing stabilization and even signs of recovery in its core Advanced Process Solutions and MTS businesses, with strong quoting activity, order wins after the quarter, and customers indicating delayed rather than canceled projects, suggesting future revenue growth as the macroeconomic environment improves.
  
• Recent strategic divestitures have strengthened the balance sheet and reduced net leverage, while significant cost synergies from acquisitions have been achieved much earlier than expected-these trends position Hillenbrand for increased net margins and financial flexibility over the long term.
  
• The accelerating push toward in-region, for-region manufacturing and local supply chains, along with tariff mitigation strategies, have differentiated Hillenbrand and reduced its exposure to trade barriers, which can help sustain or improve revenue and preserve operating margins despite global uncertainties.
  
• Cross-selling initiatives and a unified portfolio in the Food, Health and Nutrition segment, now representing over 25 percent of global revenue, are expanding addressable markets and unlocking incremental growth, directly supporting both top-line revenue and profitability over time.
  
• The company's robust backlog, continued investment in innovation and service offerings, and ability to respond quickly when market demand returns-including through recurring aftermarket revenues-provide earnings stability and enhance the likelihood of margin recovery, contradicting the case for a long-term share price decline.

Valuation

• The assumed bearish price target for Hillenbrand is $24.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Hillenbrand's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $40.0, and the most bearish reporting a price target of just $24.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.3 billion, earnings will come to $198.3 million, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 10.5%.
  
• Given the current share price of $25.77, the bearish analyst price target of $24.0 is 7.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.