Strong Demand From Boeing And Airbus Will Boost Future Aerospace Growth

Key Takeaways

• Expansion in Aerospace and Defense capacity and synergies with Dodge boost margins and revenue growth prospects.
  
• Deleveraging balance sheet and strong aerospace demand position RBC for mergers to drive future growth.
  
• Capacity issues, supply chain disruptions, and geopolitical risks threaten revenue and margins across multiple segments for RBC Bearings.

Catalysts

Manufactures and markets engineered precision bearings, components, and systems in the United States and internationally.

• RBC Bearings' Aerospace and Defense segment saw significant demand, and the company is actively expanding capacity to meet this demand, which should drive revenue growth.
  
• The company is experiencing gross margin expansion due to increased absorption of Aerospace and Defense capacity and ongoing synergies with Dodge, positively impacting future net margins.
  
• Due to strong demand from Boeing and Airbus, which have extensive order backlogs, RBC Bearings anticipates continued strong growth in the Aerospace sector, potentially boosting future revenues.
  
• The company's ability to deleverage its balance sheet, freeing up cash flow following the end of a preferred dividend, positions RBC for potential future mergers and acquisitions to drive further growth and earnings.
  
• The expected increase in U.S. Defense spending, coupled with rising international investment in defense, provides a favorable environment for RBC's Defense segment, likely impacting future revenues positively.

RBC Bearings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming RBC Bearings's revenue will grow by 7.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.5% today to 20.5% in 3 years time.
• Analysts expect earnings to reach $410.8 million (and earnings per share of $12.53) by about March 2028, up from $217.0 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 44.6x on those 2028 earnings, down from 48.3x 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 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 7.35%, as per the Simply Wall St company report.

RBC Bearings Future Earnings Per Share Growth

Risks

• The company faced capacity limitations in the Defense segment, potentially constraining its ability to meet demand, which could limit revenue growth.
  
• Strikes and other supply chain challenges in Boeing and Textron introduced volatility in the Aerospace segment, potentially impacting future revenues.
  
• The Industrial OEM business saw a decline due in part to the oil and gas sector's inventory corrections, which may continue to affect revenues if the demand does not normalize.
  
• Exposure to geopolitical risks and tariff changes, particularly with China and Mexico, could impact costs and profit margins if tariffs significantly increase.
  
• The heavy reliance on Boeing and Airbus for growth in the Commercial Aerospace segment introduces risk, as any interruptions in their production schedules could affect RBC Bearings' earnings.

Valuation

• The analysts have a consensus price target of $390.0 for RBC Bearings 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 2028, revenues will be $2.0 billion, earnings will come to $410.8 million, and it would be trading on a PE ratio of 44.6x, assuming you use a discount rate of 7.4%.
• Given the current share price of $335.41, the analyst price target of $390.0 is 14.0% 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.