Thriving On Electric Motor Innovation And Expanding Global LNG Demand Spurs Growth

Key Takeaways

• The acquisition and strategic repositioning focus on electric motor drive compression are expected to enhance earnings, profitability, and business prospects with blue-chip customers.
  
• Long-term revenue growth is driven by global LNG projects and increased demand for natural gas, along with investments in high-return growth opportunities.
  
• Acquisitions, leveraged financial strategies, and geographic concentration pose potential risks to profitability and earnings if market or operational conditions falter.

Catalysts

Operates as an energy infrastructure company in the United States.

• The acquisition of TOPS is expected to be accretive to net income and cash flow, enhancing earnings and expanding business prospects with blue-chip customers, particularly in the electric motor drive compression market. This is likely to impact revenue and earnings positively.
  
• The anticipated wave of global LNG projects approved and sanctioned, along with additional electrical generation to support AI and data centers in the U.S., is expected to increase the demand for natural gas. This structural increase in demand serves as a catalyst for long-term revenue growth.
  
• Increased focus on electric motor drive compression units and high-margin large midstream compression units as core business offerings. This strategic repositioning is expected to enhance utilization, pricing, and profitability, boosting net margins.
  
• Continued investment in high-return growth opportunities, such as expanding the electric motor drive fleet and improving technology, is expected to deliver robust internal rates of return, thereby significantly enhancing earnings and cash flow.
  
• The focus on improving profitability, evidenced by record monthly revenue per horsepower and a high adjusted gross margin, points to an increase in efficiency and pricing leverage, suggesting a potential rise in both net margins and earnings.

Archrock Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Archrock's revenue will grow by 14.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.1% today to 21.1% in 3 years time.
• Analysts expect earnings to reach $340.5 million (and earnings per share of $1.93) by about November 2027, up from $143.4 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 17.5x on those 2027 earnings, down from 30.0x today. This future PE is greater than the current PE for the US Energy Services industry at 16.6x.
• Analysts expect the number of shares outstanding to grow by 0.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.19%, as per the Simply Wall St company report.

Archrock Future Earnings Per Share Growth

Risks

• The integration of the TOPS acquisition could pose risks if the anticipated financial benefits and synergies are not realized as expected, potentially impacting net margins and earnings.
  
• Inflationary pressures, particularly related to costs of maintenance and parts, could negatively affect profitability if not managed with corresponding price increases, putting pressure on net margins.
  
• High levels of leverage, with a target ratio of 3 to 3.5x, could present risk if financial performance underperforms projections, affecting the company's ability to invest in growth opportunities and impacting earnings.
  
• The success of capital allocation strategies, including significant investments in growth CapEx and the balance between share buybacks and dividends, is contingent on market conditions and could impact future cash flows and shareholder returns.
  
• Dependence on the Permian Basin and continued strong demand from that region presents a geographic concentration risk, which might affect revenue stability if market conditions shift in that area.

Valuation

• The analysts have a consensus price target of $26.0 for Archrock 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 2027, revenues will be $1.6 billion, earnings will come to $340.5 million, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 9.2%.
• Given the current share price of $24.54, the analyst's price target of $26.0 is 5.6% 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.