Timber Technologies And Big Lake Lumber Will Spark Future Success

Key Takeaways

• Recent acquisitions and division momentum promise substantial future revenue growth and improved gross and net margins.
  
• Strategic diversification and structural changes aim to stabilize costs and enhance earnings despite fluctuating input expenses.
  
• Dependency on acquisitions and demand sensitivity pose revenue risks, while increased expenses and financial exposure could stress margins and financial stability.

Catalysts

A diversified holding company, engages in the construction business in the United States.

• The recent acquisition of Timber Technologies and Big Lake Lumber has led to substantial revenue growth due to their contributions, with Timber Technologies providing higher gross margins, which should positively impact future revenue and gross profits.
  
• Momentum in the Building Solutions division has picked up significantly, with numerous large projects receiving approvals in the second half of 2024, laying the groundwork for increased future revenues and potentially higher net margins as the division capitalizes on gains from these projects.
  
• The establishment of the Energy Services division through the acquisition of Alliance Drilling Tools diversifies Star Equity's portfolio, providing a new growth platform with strong revenue potential and consistent cash generation, enhancing future earnings.
  
• Ongoing structural changes, such as reducing reliance on Canadian lumber and implementing protective contract strategies, aim to stabilize cost structures, potentially preserving net margins amid fluctuating input costs.
  
• The strengthened sales pipeline and backlog in the Building Solutions division, aligned with favorable long-term industry trends towards factory-built construction, suggest promising opportunities for increased revenues and profit expansion going forward.

Star Equity Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Star Equity Holdings's revenue will grow by 30.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -23.4% today to 3.2% in 3 years time.
• Analysts expect earnings to reach $3.7 million (and earnings per share of $1.19) by about May 2028, up from $-12.5 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 11.1x on those 2028 earnings, up from -0.5x today. This future PE is greater than the current PE for the US Consumer Durables industry at 8.9x.
• Analysts expect the number of shares outstanding to grow by 1.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Star Equity Holdings Future Earnings Per Share Growth

Risks

• Star Equity Holdings faces uncertainties related to forward-looking statements, which may lead to actual results differing materially from expectations, potentially impacting future earnings and share price.
  
• The company's reliance on acquisitions such as Timber Technologies and Big Lake Lumber for revenue growth indicates potential risks if acquisitions do not perform as expected, affecting revenue and profit margins.
  
• Demand softness in the Building Solutions division, influenced by interest rate sensitivity and credit availability, could negatively impact future revenues and gross profit if these economic conditions persist.
  
• Increased SG&A expenditures, largely due to ongoing acquisition impacts, may pressure net margins, especially if revenue growth does not keep pace with cost increases.
  
• Default notice to Enservco regarding a $1 million promissory note indicates potential financial exposure, which could negatively affect other income and overall financial stability.

Valuation

• The analysts have a consensus price target of $10.0 for Star Equity Holdings 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 $12.0, and the most bearish reporting a price target of just $8.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $117.8 million, earnings will come to $3.7 million, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 11.4%.
• Given the current share price of $2.0, the analyst price target of $10.0 is 80.0% 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.