Advanced Tech And Clean Energy Ventures Promise Growth Amid Shrinking Margins And Market Challenges

Key Takeaways

• Transitioning to a solutions-based focus with advanced on-truck technologies could significantly enhance revenue per unit by adding complex value.
  
• Investments in clean energy and hydrogen-powered zero-emission solutions anticipate regulatory changes, aiming for a new revenue stream in a growing market interest area.
  
• Decreased demand in the global lift truck market and potential revenue and earnings declines due to customer order cancellations and softer markets.

Catalysts

Through its subsidiaries, designs, engineers, manufactures, sells, and services a line of lift trucks, attachments, and aftermarket parts worldwide.

• Hyster-Yale is transitioning to a solutions-based company with a focus on complex value-adding technology solutions, which could drive higher revenue per unit through advanced on-truck technologies, impacting revenue growth.
  
• Expansion of the 1 to 3.5-ton modular scalable product line and the launch of additional scalable products in late 2024 and 2025 are expected to increase market share and hence, revenue in the Americas and globally.
  
• The reduction in supplier count from 750 to 150 for their new product line is likely to streamline production and reduce supply chain costs, which could improve net margins by lowering overall operating costs.
  
• Increased focus on maintaining competitively priced products at or above target margin levels through new models, cost decreases, and ongoing pricing discipline is expected to sustain or improve product margins.
  
• Investment in the burgeoning clean energy segment with Nuvera's hydrogen-powered zero-emission mobile generators is set to meet emergent market demands, potentially leading to a new revenue stream ahead of regulatory changes and increasing market interest in clean energy solutions.

Assumptions

• Analysts are assuming Hyster-Yale's revenue will grow by 1.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 4.1% today to 2.8% in 3 years time.
• Analysts expect earnings to reach $126.0 million (and earnings per share of $6.96) by about September 2027, down from $175.8 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 14.1x on those 2027 earnings, up from 5.9x today. This future PE is lower than the current PE for the US Machinery industry at 21.0x.
• Analysts expect the number of shares outstanding to grow by 1.81% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.57%, as per the Simply Wall St company report.

Risks

• Significant decrease in global lift truck market demand, especially a 56% year-over-year decrease in North America factory bookings for Q2 2024, indicating potential revenue declines as the market adjusts from pandemic-era highs.
  
• Risk of continued order cancellations and deferrals by customers, driven by lower-than-expected activity levels, which could lead to revenue shortfalls and impact earnings negatively.
  
• A projected moderation in global production levels in 2025 due to softening markets and volatility, which may result in lower manufacturing throughput and negatively affect net margins, particularly if booking levels do not return to normalized growth rates.
  
• Potential challenges in achieving expected financial results from the Nuvera business segment, given the decreased revenues due to slower customer adoption of hydrogen fuel cells and ongoing hydrogen supply constraints, which may impact overall earnings and slow down growth in clean energy segments.
  
• Inventory reduction efforts may not achieve targeted levels, contributing to higher working capital than desired and impacting cash flows negatively if inventory levels do not align with decreased demand and production adjustments.

Valuation

• The analysts have a consensus price target of $79.5 for Hyster-Yale based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.5 billion, earnings will come to $126.0 million, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $59.68, the analyst's price target of $79.5 is 24.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.