Aftermarket Demand And Global Modernization Will Unlock Enduring Value

Key Takeaways

• Sustained demand for aftermarket parts and modernization solutions is driving recurring high-margin revenue, supported by trends in equipment aging and increased regulatory focus on efficiency.
  
• Strategic acquisitions and innovations in sustainability, automation, and IoT offerings are expanding Kadant's market reach, ensuring greater diversification and long-term revenue growth visibility.
  
• Margin and growth pressures persist due to tariff uncertainty, aging installed base, rising costs, and structural weakness in key international and aftermarket segments.

Catalysts

Supplies technologies and engineered systems worldwide.

• The aging installed base across key industrial and processing markets has led to elevated aftermarket parts demand, a trend expected to continue as delayed capital investments over the last two years force customers to maintain older equipment-supporting robust recurring high-margin revenue and gross margin stability.
  
• Global infrastructure and engineered wood project cycle is rebounding, especially in North America and emerging markets, driven by sustained urbanization and broader adoption of engineered materials, which is expanding Kadant's capital equipment order pipeline and offering forward visibility for sequential revenue growth.
  
• Strategic acquisitions (Dynamic Sealing Technologies, Babbini, GPS) are broadening Kadant's addressable markets and technology capabilities in upcycling, fluid rotary unions, and dewatering, which enhances diversification and positions Kadant to tap into growing sustainability and circular economy-focused customer requirements-potentially accelerating revenue and market share.
  
• Rising investments in process efficiency, automation, and digital monitoring are reflected in both product innovation and customer spending priorities; Kadant's ongoing expansion of aftermarket optimization technologies and IoT-enabled offerings is likely to further increase long-term customer retention and recurring aftermarket/service revenues-supporting improved earnings quality.
  
• Tightening global regulations and heightened customer focus on resource efficiency are prompting capital spending on modernization and environmentally friendly solutions, and Kadant's growing backlog of capital projects (especially in fiber processing and engineered wood) positions the company to benefit from these long-term industry trends-impacting both top-line growth and continued margin resilience.

Kadant Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kadant's revenue will decrease by 0.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.6% today to 11.7% in 3 years time.
• Analysts expect earnings to reach $124.5 million (and earnings per share of $10.48) by about July 2028, up from $111.0 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 36.9x on those 2028 earnings, up from 36.5x today. This future PE is greater than the current PE for the US Machinery industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.63%, as per the Simply Wall St company report.

Kadant Future Earnings Per Share Growth

Risks

• Uncertainty from evolving global trade policies and tariffs-particularly significant steel and China import tariffs-continues to create hesitancy among customers, resulting in delayed capital equipment orders and making long-term revenue timing less predictable.
  
• Despite recent growth in backlog and bookings, much of the demand increase is replacement rather than new greenfield projects, particularly outside of North America, signaling possible saturation or structural stagnation in key end markets and limiting revenue growth potential.
  
• A high percentage of recent revenues and gross margin strength is attributable to an aging installed base driving aftermarket parts sales; as customers eventually replace outdated equipment, the high-margin parts and consumables segment may decrease relative to total sales, pressuring both revenue mix and net margins.
  
• The company faces increasing SG&A expenses as a percentage of revenue (now nearing 28%), driven by foreign currency headwinds, acquisition integration costs, and potentially sustained elevated compliance/R&D outlays, risking long-term erosion of net margins if cost discipline or growth in higher-margin segments lags.
  
• Ongoing weakness and economic challenges in China-one of Kadant's major geographic markets-as well as tepid growth in parts of Europe, could structurally reduce international growth opportunities and expose Kadant to cyclical swings and a shrinking global addressable market, impacting long-term revenue and earnings stability.

Valuation

• The analysts have a consensus price target of $335.0 for Kadant 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 $380.0, and the most bearish reporting a price target of just $275.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $124.5 million, and it would be trading on a PE ratio of 36.9x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $344.41, the analyst price target of $335.0 is 2.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.