Upsized Contracts And In-house Manufacturing Will Secure Future Stability

Key Takeaways

• Increased contract sizes and longer tenors enhance revenue stability and financial projections, boosting earnings visibility.
  
• Strategic operational enhancements and vertical integration aim to reduce costs and drive revenue growth, improving margins and capital returns.
  
• Customer concentration risk and compliance challenges pose significant threats to Solaris, with potential impacts on revenue, net margins, and future growth.

Catalysts

Provides mobile and scalable equipment-based solutions for use in distributed power generation and management of raw materials used in the completion of oil and natural gas wells in the United States.

• The upsizing of the commercial contract to 900 megawatts and an extended tenor of 7 years increases contracted earnings visibility and should greatly enhance future revenue stability.
  
• The expansion of average contract tenor from 6 months a year ago to over 5 years provides Solaris with improved earnings visibility and stability, enhancing long-term financial projections and boosting revenue forecasts.
  
• The secured additional 330 megawatts of generation capacity, despite tight OEM supply chains, positions Solaris well to capitalize on future demand increases, thus potentially driving up revenue growth.
  
• The cross-training of logistics staff for roles in the growing Power Solutions segment helps leverage internal expertise, reduce hiring costs, and improve operational efficiencies, which could enhance net margins.
  
• Bringing selected manufacturing processes in-house, such as components for emissions control systems, is expected to lower costs and improve returns on capital, potentially boosting net margins and earnings.

Solaris Energy Infrastructure Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Solaris Energy Infrastructure's revenue will grow by 30.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.3% today to 19.6% in 3 years time.
• Analysts expect earnings to reach $161.7 million (and earnings per share of $3.76) by about May 2028, up from $15.8 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 28.8x on those 2028 earnings, down from 51.6x today. This future PE is greater than the current PE for the US Energy Services industry at 10.5x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.53%, as per the Simply Wall St company report.

Solaris Energy Infrastructure Future Earnings Per Share Growth

Risks

• The OEM supply chain for the additional generation capacity has become progressively tighter, suggesting potential risks in securing future equipment, potentially impacting projected future revenue and growth.
  
• The initial turbine vendor partnership limits flexibility in sourcing equipment, which may lead to increased costs and a higher risk profile for future expansions if any disruptions occur, affecting net margins.
  
• Solaris' reliance on key partnerships and large contracts with a limited number of customers, such as the joint venture with a major data center player, concentrates revenue streams and introduces customer concentration risk that could impact earnings if customer demands or financial situations change.
  
• The company has observed some of its logistics customers delay jobs or reduce activities due to recent commodity price softness; this could impact near-term revenues if prolonged.
  
• Increasing regulatory challenges for data centers are highlighted as supportive, yet they pose a compliance risk which could result in increased operational costs and capex to adhere to evolving environmental standards, potentially affecting net margins.

Valuation

• The analysts have a consensus price target of $45.667 for Solaris Energy Infrastructure 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 $53.0, and the most bearish reporting a price target of just $36.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $826.2 million, earnings will come to $161.7 million, and it would be trading on a PE ratio of 28.8x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $21.18, the analyst price target of $45.67 is 53.6% 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.