Optimized Portfolio And New Brazilian Plant Will Cut Costs

Key Takeaways

• Strategic cost reduction and portfolio optimization are set to enhance profitability and margins, positively impacting net margins and earnings.
  
• Expansion and innovation in Brazil and China aim to drive organic growth, positioning Ashland for significant revenue and earnings improvements.
  
• Persistent pricing pressures, competitive challenges, and demand uncertainties pose risks to Ashland's revenue growth, market share, and profitability.

Catalysts

Provides additives and specialty ingredients in the North and Latin America, Europe, Asia Pacific, and internationally.

• Ashland has completed its portfolio optimization, selling the Avoca business and implementing a $30 million cost reduction plan, which is expected to enhance future profitability and margins. This is likely to positively impact net margins and earnings.
  
• The inauguration of a new tablet coatings plant in Brazil is expected to enhance technical support and drive organic growth in the Life Sciences segment, potentially increasing revenue.
  
• The company is accelerating a $60 million manufacturing optimization plan, expected to yield increased financial impact in the second half of fiscal year 2025 and into fiscal year 2026, likely improving net margins and earnings.
  
• Ashland aims to achieve $90 million in cost savings, with $13 million expected to be realized in the second half of fiscal year 2025. This should enhance profitability and bolster net margins.
  
• The company's strategic focus on innovation and globalization includes the development of new facilities in China and Brazil, positioning Ashland for significant future growth, which could substantially impact revenue and earnings.

Ashland Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ashland's revenue will decrease by 0.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -4.4% today to 14.1% in 3 years time.
• Analysts expect earnings to reach $277.0 million (and earnings per share of $3.98) by about May 2028, up from $-86.0 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 11.1x on those 2028 earnings, up from -25.6x today. This future PE is lower than the current PE for the US Chemicals industry at 20.2x.
• Analysts expect the number of shares outstanding to decline 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 8.03%, as per the Simply Wall St company report.

Ashland Future Earnings Per Share Growth

Risks

• The mixed demand environment with a 17% year-on-year decrease in Q2 sales, and specifically a 5% decline excluding portfolio optimization, reflects a slower trend than expected, which could impact future revenue growth.
  
• Persistent pricing pressures, particularly in Intermediates, have resulted in margins falling below expectations, indicating potential risks to net margins and profitability.
  
• Increased economic uncertainty and anticipated softer consumer demand are causing adjustments to the fiscal year '25 outlook, which could negatively influence earnings projections.
  
• Competitive intensity in export markets like the Middle East, Africa, and India, coupled with volume declines in China, may affect market share, potentially reducing revenue and profit margins.
  
• Tariff-related challenges, especially concerning U.S.-produced sales to China, could introduce additional costs and complexities, putting pressure on profitability and potentially affecting net margins.

Valuation

• The analysts have a consensus price target of $67.778 for Ashland 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 $85.0, and the most bearish reporting a price target of just $50.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.0 billion, earnings will come to $277.0 million, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $48.14, the analyst price target of $67.78 is 29.0% 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.