Integration And Sustainability Focus Will Expand Future Market Share

Key Takeaways

• The One Interface strategy and integration efforts are driving growth, improving revenue, and expanding market share in the Americas.
  
• Advancements in automation and a focus on sustainability and innovation are boosting operational efficiencies and brand recognition, potentially increasing profitability.
  
• Flat international sales, volatile retail billings, and increased expenses could pressure revenue growth and margins, despite strong health care order potential.

Catalysts

Designs, produces, and sells modular carpet products primarily worldwide.

• The One Interface strategy, which integrates global functions and enhances productivity among the commercial team, has shown early positive results with a focus on sustainability and innovation. This is expected to continue driving growth and improving revenue.
  
• The recent integration of the nora and Interface sales teams in the U.S. has resulted in an 18% increase in currency-neutral net sales in the Americas, which could lead to higher revenue growth and market share expansion.
  
• Automation and complexity reduction in manufacturing facilities, with plans for new automation and robotics solutions, are anticipated to enhance operational efficiencies and expand margins, positively impacting net margins and profitability.
  
• Sustained growth in specific sectors such as global education and corporate office spaces, coupled with a strong backlog, indicates a continuous revenue increase, as these sectors leverage their broad product portfolio and customer relationships.
  
• The company’s focus on sustainability and innovations, such as carpet recycling and low-carbon product offerings, may open new markets and align with customer goals, potentially contributing to increased revenues and improved brand recognition.

Interface Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Interface's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.5% today to 7.7% in 3 years time.
• Analysts expect earnings to reach $113.4 million (and earnings per share of $1.94) by about December 2027, up from $84.6 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 18.6x on those 2027 earnings, up from 17.7x today. This future PE is lower than the current PE for the US Commercial Services industry at 31.0x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.01%, as per the Simply Wall St company report.

Interface Future Earnings Per Share Growth

Risks

• Flat sales in EAAA, with stagnant growth in EMEA and declining sales in Asia and Australia, could signal challenges in international markets affecting overall revenue growth.
  
• Retail billings are subject to volatility due to periodic unplanned deferrals, potentially impacting revenue consistency and future cash flows.
  
• Health care billings are experiencing a long sales and installation cycle, with weak third-quarter figures indicating potential short-term revenue delays despite strong order growth.
  
• The company's increased reliance on automation investments requires savings to fund them, posing a risk of unexpected capital expenditure impacts and affecting net margins.
  
• Increasing SG&A expenses, despite revenue growth, could pressure net margins if not effectively managed, especially with anticipated inflation in 2025.

Valuation

• The analysts have a consensus price target of $29.67 for Interface 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 $33.0, and the most bearish reporting a price target of just $26.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.5 billion, earnings will come to $113.4 million, and it would be trading on a PE ratio of 18.6x, assuming you use a discount rate of 7.0%.
• Given the current share price of $25.75, the analyst's price target of $29.67 is 13.2% 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.