Electrification And AI Data Centers Will Support Steady Yet Constrained Prospects

Catalysts

About UL Solutions

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

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

• Increasing electrification in vehicles and industrial systems is driving more complex testing needs. This is supported by UL Solutions' new high voltage and high speed rotational lab capacity in Japan, which can sustain demand for certification services and support revenue.
• Growth in AI data centers is raising requirements for safety, power quality and energy efficiency across power supplies, automation equipment and data center infrastructure. This can support higher volumes in Industrial and Consumer testing and influence revenue and mix driven margin.
• Rising regulatory and corporate focus on product level emissions reporting is increasing the need for tools like the AI powered carbon footprint capability within ULTRUS UL 360. This can support recurring software revenue and potentially higher free cash flow relative to revenue.
• Global expansion of energy generation, transmission, storage and related materials testing is increasing demand for independent safety and performance assessment. UL Solutions' focus on these areas can support utilization of existing labs and influence adjusted EBITDA margin.
• Customer product redesigns in response to component cost changes and supply chain shifts are creating ongoing retesting needs across Consumer and Industrial customers. This can support ongoing certification revenue and contribute to operating leverage and earnings.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on UL Solutions compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming UL Solutions's revenue will grow by 5.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 16.1% today to 14.3% in 3 years time.
• The bearish analysts expect earnings to reach $524.7 million (and earnings per share of $2.43) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 38.3x on those 2029 earnings, up from 30.3x today. This future PE is greater than the current PE for the US Professional Services industry at 22.3x.
• The bearish analysts expect the number of shares outstanding to grow by 0.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.46%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Secular growth in electrification, energy transition and AI data centers is already supporting higher testing demand across Industrial and Consumer segments at UL Solutions, so if this demand remains solid, it could support revenue growth, adjusted EBITDA and earnings beyond what a flat share price view assumes.
• The company is increasing capital expenditure to about 8.5% of revenue in 2026 to expand and modernize laboratories for areas like high voltage automotive testing, energy storage and large scale fire testing, and if these long term investments are utilized well, they could support higher revenue and free cash flow compared with a scenario where the share price stays unchanged.
• Ongoing portfolio actions such as the pending acquisition of Eurofins Electrical & Electronics and the sale of the DQS stake are intended to sharpen focus on higher growth and higher margin areas, and if integration and execution are effective, this could support revenue mix, adjusted EBITDA margin and earnings in a way that contradicts an assumption of a flat UL Solutions share price.
• Company wide productivity improvements, operating leverage and restructuring benefits are already contributing to higher adjusted EBITDA margin and free cash flow, and if these efficiency gains continue over the long term, they may support sustained margin strength and earnings growth that a stable share price view does not fully reflect.
• Expanding software and data capabilities such as the AI powered carbon footprint tool within ULTRUS UL 360 are aligned with longer term regulatory and supply chain transparency needs, and if adoption continues to build, recurring software revenue and free cash flow margin could strengthen faster than a flat UL Solutions share price thesis anticipates.

Valuation

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

• The assumed bearish price target for UL Solutions is $79.0, which represents up to two standard deviations below the consensus price target of $97.32. 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 more bearish 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 bearish analyst cohort, you'd need to believe that by 2029, revenues will be $3.7 billion, earnings will come to $524.7 million, and it would be trading on a PE ratio of 38.3x, assuming you use a discount rate of 7.5%.
• Given the current share price of $76.04, the analyst price target of $79.0 is 3.7% 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.