Expanding Sales Infrastructure Will Accelerate Future Market Penetration Of Zerust Oil & Gas

Key Takeaways

• Strategic expansion in the oil and gas sector and robust bioplastics growth are expected to drive significant future revenue increases.
  
• Operational enhancements and a growing presence in China indicate potential for increased market share and profitability.
  
• NTIC's limited oil and gas market share, unpredictable revenue, and geopolitical risks threaten financial stability, while expansion efforts pose cost challenges.

Catalysts

Develops and markets rust and corrosion inhibiting solutions in North America, South America, Europe, the Middle East, China, Brazil, India, Rest of Asia, and internationally.

• NTIC's strategic investments in expanding the oil and gas sales infrastructure in response to increasing customer activity are expected to accelerate Zerust Oil & Gas sales in the second half of fiscal 2025, potentially boosting revenue.
  
• The robust sales growth in the Natur-Tec bioplastics business, driven by new customer wins and expanded customer relationships, is anticipated to continue, which could lead to higher future revenue and profitability.
  
• With improving sales trends and stabilization in China, NTIC expects the Chinese market to significantly contribute to its industrial and bioplastics segments, implying potential revenue and earnings growth.
  
• The ongoing demand for Zerust Oil & Gas solutions to protect oil storage tanks and pipelines offers substantial opportunities for market penetration, with NTIC positioned to capture a larger market share, thus possibly increasing future revenue.
  
• NTIC's operational improvements, such as quality system enhancement initiatives leading to gross margin growth, indicate possible increases in net margins and overall profitability in the future.

Northern Technologies International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Northern Technologies International's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.9% today to 8.5% in 3 years time.
• Analysts expect earnings to reach $9.3 million (and earnings per share of $0.89) by about January 2028, up from $5.1 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 26.0x on those 2028 earnings, up from 22.6x today. This future PE is greater than the current PE for the US Chemicals industry at 22.6x.
• Analysts expect the number of shares outstanding to grow by 3.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.61%, as per the Simply Wall St company report.

Northern Technologies International Future Earnings Per Share Growth

Risks

• NTIC's reliance on a limited footprint within the oil and gas market poses a risk as its current market share is not even 1% of the available tanks, impacting potential revenue scalability.
  
• The seasonal and lumpy nature of oil and gas sales, especially in colder months, may cause unpredictable revenue streams, affecting financial stability and net margins.
  
• Strategic investments in expanding sales infrastructure, particularly in Southeast Asia and the Middle East, could lead to increased operating expenses without guaranteed returns, thereby impacting earnings.
  
• Political and economic uncertainties in China and Europe pose risks to revenue stability, especially given China's uncertain demand recovery and Europe's joint ventures grappling with energy price volatility.
  
• The company's increasing debt levels and focus on working capital efficiencies might divert resources from growth initiatives, impacting future earnings potential.

Valuation

• The analysts have a consensus price target of $20.0 for Northern Technologies International 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 2028, revenues will be $109.5 million, earnings will come to $9.3 million, and it would be trading on a PE ratio of 26.0x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $12.13, the analyst's price target of $20.0 is 39.4% 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.