Vapor Power And FATI Acquisitions Will Expand Future Capacity

Key Takeaways

• Diversification into MRO-related projects and strategic acquisitions are expected to stabilize revenue and improve margins, enhancing future growth prospects.
  
• Strong backlog growth and cost-saving initiatives provide confidence in future revenue, supporting earnings growth and efficient capital allocation strategy.
  
• Uncertainty from tariffs and acquisition delays, compounded by macroeconomic factors, threatens revenue growth, profitability, and fiscal target achievement post-2026.

Catalysts

Provides engineered industrial process heating solutions for process industries in the United States and Latin America, Canada, Europe, the Middle East, Africa, and the Asia-Pacific.

• Thermon Group's strategic focus on diversifying their revenue base and increasing exposure to short-cycle projects, particularly in MRO-related recurring revenue, is expected to provide a more stable and profitable revenue stream, boosting future revenue and margins.
  
• The company's strong backlog growth, up 48% in reported terms and 9% organically, coupled with solid order trends, enhances visibility and confidence in future growth, likely impacting future revenue positively.
  
• Efficiencies gained from ongoing cost savings and productivity initiatives, as evidenced by achieving a high quarterly adjusted EBITDA margin of nearly 24%, are expected to improve net margins over time.
  
• The strategic acquisitions, such as Vapor Power and F.A.T.I., are expected to contribute to expanded capacity and backlog conversion, aiding future revenue growth once integration and capacity issues are resolved.
  
• Thermon's focus on capital allocation strategy, including investments in organic growth and strategic M&A, indicates potential earnings growth, with leverage being comfortably low, which supports continued execution on these priorities.

Thermon Group Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Thermon Group Holdings's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.7% today to 12.1% in 3 years time.
• Analysts expect earnings to reach $69.9 million (and earnings per share of $1.97) by about August 2028, up from $53.5 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 20.1x on those 2028 earnings, up from 17.2x today. This future PE is lower than the current PE for the US Electrical industry at 28.6x.
• Analysts expect the number of shares outstanding to decline by 2.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.09%, as per the Simply Wall St company report.

Thermon Group Holdings Future Earnings Per Share Growth

Risks

• The aggressive approach to tariffs has created additional uncertainty in the business, potentially impacting customer behavior and revenue from international operations.
  
• Persistent pressure and decision delays in large CapEx projects have led to a projected decrease in revenue, which could affect future revenue growth and EBITDA margins.
  
• A relatively high percentage (roughly 10%) of the total cost of goods sold is exposed to U.S.-Canada tariffs, which could impact profitability if tariff situations worsen.
  
• The acquisition-related activities have shown modest revenue declines and margin drags in the short term, impacting net earnings until integration improves.
  
• Prolonged delays in improving the macroeconomic backdrop and timing of acquisitions in the M&A pipeline could push the achievement of fiscal targets beyond 2026, potentially affecting anticipated revenue growth and profitability.

Valuation

• The analysts have a consensus price target of $36.0 for Thermon Group Holdings 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 $579.5 million, earnings will come to $69.9 million, and it would be trading on a PE ratio of 20.1x, assuming you use a discount rate of 9.1%.
• Given the current share price of $28.23, the analyst price target of $36.0 is 21.6% 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.