Electrification And Data Center Demand Will Support Strong Long-Term Potential

Catalysts

About UL Solutions

UL Solutions provides safety science expertise, testing, inspection, certification and related software that help customers bring products and systems to market.

What are the underlying business or industry changes driving this perspective?

• Rising demand tied to the energy transition and the electrification of everything is supporting growth in Industrial services such as materials, energy, automation, power and controls, and wire and cable, which can underpin revenue and operating income over time.
• Expanding needs around data centers, including power supplies for AI racks, servers and broader data center product certification, are helping both Industrial and Consumer segments. This can support revenue growth and mix that is favorable for margins.
• New and expanded laboratories, including the high voltage EMC facility in Toyota City and the large-scale fire lab in Northbrook, are increasing capacity in areas like electrified vehicles and fire risk testing, which can support higher future revenue and asset utilization.
• Ongoing investment in energy storage and EMC testing capacity across regions is aligned with growth in energy storage systems and complex electronics, which can drive higher certification testing volumes and support adjusted EBITDA margins.
• Restructuring that removes lower growth, lower margin service lines and focuses on higher growth product testing, appliances and HVAC, and software offerings like ULTRUS UL 360 is supporting a leaner cost base and more profitable revenue, which can benefit adjusted EBITDA and free cash flow.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on UL Solutions compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming UL Solutions's revenue will grow by 8.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 16.1% today to 13.5% in 3 years time.
• The bullish analysts expect earnings to reach $535.2 million (and earnings per share of $2.49) by about August 2029, up from $506.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 56.8x on those 2029 earnings, up from 31.5x today. This future PE is greater than the current PE for the US Professional Services industry at 22.6x.
• The bullish analysts expect the number of shares outstanding to grow by 0.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.34%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• UL Solutions is leaning into long-term themes like the energy transition, electrification, data centers and automation, yet the advisory business tied to solar and wind in the United States is already seeing headwinds, which shows that parts of this exposure can soften and weigh on Industrial segment revenue and segment margins.
• The company is actively reshaping its portfolio through its Restructuring Plan, exits of lower growth and lower margin Consumer services, the divestiture of the EHS Software business and the pending Eurofins Electrical & Electronics acquisition. If these moves do not produce enough higher quality revenue to offset lost or disrupted activities, consolidated revenue growth and adjusted EBITDA margin could come under pressure.
• Higher performance based compensation and stock based incentives are already lifting operating expenses. If UL Solutions continues to depend on broad incentive plans to attract and retain talent while growth moderates, this could limit future operating margin expansion and constrain earnings growth.
• Capital expenditures are planned at about 8.5% of revenue for 2026 to expand laboratories in areas like high voltage EMC, fire testing and energy storage. If demand for these long-lived assets levels off or ramps more slowly than expected, utilization could lag and dampen free cash flow margin and returns on invested capital.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for UL Solutions is $120.0, which represents up to two standard deviations above the consensus price target of $98.23. This valuation is based on what can be assumed as the expectations of UL Solutions's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $120.0, and the most bearish reporting a price target of just $79.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $4.0 billion, earnings will come to $535.2 million, and it would be trading on a PE ratio of 56.8x, assuming you use a discount rate of 7.3%.
• Given the current share price of $79.05, the analyst price target of $120.0 is 34.1% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
• 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.