SGK Brand Solutions Deal Will Generate $50 Million Synergies

Key Takeaways

• Resuming DBE technology marketing and launching new products in product identification may boost revenue and market share in key segments.
  
• SGK Brand Solutions sale and cost reduction programs improve margins and financial position, enhancing overall operational efficiency and growth.
  
• Ongoing litigation, declining sales, and potential higher interest expenses pose risks to Matthews International's future revenue and profitability.

Catalysts

Provides brand solutions, memorialization products, and industrial technologies worldwide.

• The arbitration ruling in favor of Matthews International regarding the DBE technology allows the company to resume marketing its solutions, potentially increasing sales and revenue growth in the energy segment by securing new customers and expanding existing relationships.
  
• The sale and integration deal of the SGK Brand Solutions segment is expected to generate $50 million in synergies over 24 to 30 months, significantly improving growth and enhancing net margins for Matthews, as it focuses on higher-margin businesses.
  
• Proceeds from the SGK transaction will be used to reduce debt, improving Matthews International's financial structure and potentially reducing interest expenses, which can positively impact earnings.
  
• The company's cost reduction programs, expected to yield annual savings of up to $50 million, indicate a potential increase in net margins and earnings as operations become more efficient.
  
• The development and launch of new technology in the product identification segment, including advancements in 2D coding, may lead to increased market share and revenue growth as these new products meet emerging industry needs.

Matthews International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Matthews International's revenue will decrease by 0.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.5% today to 5.5% in 3 years time.
• Analysts expect earnings to reach $97.0 million (and earnings per share of $3.1) by about March 2028, up from $-60.8 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 17.1x on those 2028 earnings, up from -11.6x today. This future PE is lower than the current PE for the US Commercial Services industry at 30.0x.
• Analysts expect the number of shares outstanding to grow by 0.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.27%, as per the Simply Wall St company report.

Matthews International Future Earnings Per Share Growth

Risks

• The ongoing litigation with Tesla and the related negative publicity could continue to impact Matthews International's ability to secure new contracts in the advanced dry battery electrode technology segment, affecting future revenue streams.
  
• Declining sales in key segments, like the Industrial Technologies segment, primarily due to decreased sales in the engineering business, and low sales of warehouse automation solutions, indicate challenges in maintaining revenue growth in the near term.
  
• The possibility of facing higher interest expenses, as noted in the financial review, could impact net margins and overall profitability if the company's debt refinancing strategy does not yield lower interest rates.
  
• The exit from the European cremation business, while possibly reducing losses, removes a source of revenue and could impact the Memorialization segment's growth prospects.
  
• The company’s historical struggles with sales volatility and the variable impact of geopolitical and market conditions, such as the effects of COVID-19 and the Ukraine crisis, pose risks to consistently increasing earnings moving forward.

Valuation

• The analysts have a consensus price target of $41.0 for Matthews International 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 $1.8 billion, earnings will come to $97.0 million, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 9.3%.
• Given the current share price of $22.72, the analyst price target of $41.0 is 44.6% 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.