Calculated Acquisitions And Product Expansions Propel Growth In Emerging Markets

Key Takeaways

• Strategic acquisitions in high-margin industries and expansion into fast-growth markets are expected to significantly boost Standex's revenue and earnings.
  
• Strong product development and enhanced market strategies aim to drive growth and improve operational efficiency, supporting both revenue and margin expansion.
  
• Declining sales, increased leverage, and soft demand in key markets pose risks to financial stability, profit levels, and future earnings at Standex International.

Catalysts

Together with subsidiaries, engages in the manufacture and sale of various products and services for commercial and industrial markets in the United States and internationally.

• Standex International recently acquired Amran Instrument Transformers and Narayan Powertech, which operate in the high-margin electrical grid market; this acquisition is expected to be immediately accretive, enhancing revenue growth, EBITDA margin, and earnings per share, particularly as these businesses have shown a historical revenue growth of 30% annually. This impacts earnings growth.
  
• The Amran/Narayan acquisition expands Standex's footprint into fast-growing markets, including the domestic Indian market, which is one of the world's fastest-growing economies. The expansion increases Standex’s exposure to fast-growth markets from 13% to 25% of total sales, which is expected to bolster future revenue growth.
  
• Product development investments remain strong, with Standex on track to release over a dozen new products in fiscal year 2025. New products are projected to contribute over 100 basis points to incremental growth. This impacts revenue growth.
  
• Standex plans to leverage the combined capabilities of Amran/Narayan to accelerate growth into European and other global markets, enhancing their go-to-market strategy and potentially increasing margins through better integrated supply chains. This impacts net margins by driving efficiency and scale.
  
• Continued improvement in Electronics order volumes, with a sequential 15% increase in orders and a significant book-to-bill ratio, is expected to lead to mid to high single-digit organic growth in the segment by year-end, driving overall revenue growth.

Standex International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Standex International's revenue will grow by 13.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.3% today to 14.8% in 3 years time.
• Analysts expect earnings to reach $154.6 million (and earnings per share of $12.66) by about November 2027, up from $72.9 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 20.7x on those 2027 earnings, down from 33.8x today. This future PE is lower than the current PE for the US Machinery industry at 24.6x.
• Analysts expect the number of shares outstanding to grow by 0.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.9%, as per the Simply Wall St company report.

Standex International Future Earnings Per Share Growth

Risks

• Sales declined by 7.7% due to organic revenue decline and weak demand in Electronics and Engraving, which could negatively impact revenue.
  
• The acquisition of Amran/Narayan Group increased leverage to 2.2x, suggesting potential risks to financial stability and future earnings.
  
• Research and development expenses are increasing, which could pressure net margins if new products do not perform as expected.
  
• Soft demand in general industrial end markets and vehicle introductions, especially in Europe and North America, could continue to impact sales and operating income negatively.
  
• The decline in adjusted earnings per share by 1.7% year-on-year may indicate challenges in maintaining profit levels, affecting future earnings.

Valuation

• The analysts have a consensus price target of $217.9 for Standex International 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 $250.0, and the most bearish reporting a price target of just $190.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.0 billion, earnings will come to $154.6 million, and it would be trading on a PE ratio of 20.7x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $204.02, the analyst's price target of $217.9 is 6.4% higher. 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.