Volume Increases In Railroad Products Will Improve Operational Efficiencies And Support Debt Reduction

Key Takeaways

• Strategic cost reductions and lower capital expenditures will enhance operating efficiencies, free cash flow, and net margins.
  
• Volume growth and operational improvements in key segments forecast strong earnings, bolstering EPS and supporting long-term growth.
  
• Increased competition and pricing pressures could adversely affect revenue, earnings, and margins, with additional risks from market uncertainties and raw material cost volatility.

Catalysts

Provides treated wood products, wood preservation chemicals, and carbon compounds in the United States, Australasia, Europe, and internationally.

• Koppers anticipates earnings growth in 2025 from top line improvements due to projected volume increases in its Railroad Products and Services segment, which are expected to drive a 4% increase in consolidated sales. This impacts revenue positively.
  
• Cost reduction measures, including a planned workforce reduction, are expected to result in over $10 million in savings, providing greater operating efficiencies. This will improve net margins.
  
• Lower capital expenditures in 2025, compared with previous years, will help Koppers generate significant free cash flow, which they plan to use for debt reduction and share repurchases. This supports improved earnings per share (EPS).
  
• The company expects to achieve a 7% improvement in adjusted EBITDA driven by actions that they control, including better operational performance and strategic market changes. This strengthens earnings.
  
• Koppers’ strategy through 2030 is expected to support double-digit EPS growth by leveraging improved operational efficiencies, reduced interest expenses, and portfolio realignment. This enhances long-term earnings growth.

Koppers Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Koppers Holdings's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 6.5% in 3 years time.
• Analysts expect earnings to reach $147.1 million (and earnings per share of $6.98) by about March 2028, up from $52.4 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 9.7x on those 2028 earnings, down from 12.0x today. This future PE is lower than the current PE for the US Chemicals industry at 21.2x.
• Analysts expect the number of shares outstanding to decline by 3.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.23%, as per the Simply Wall St company report.

Koppers Holdings Future Earnings Per Share Growth

Risks

• Market share loss in the Performance Chemicals business, due to increased competition and aggressive pricing from competitors, could negatively impact revenue and margins.
  
• Anticipated decline in Performance Chemicals’ earnings due to the impact of competitors and projected market factors, affecting overall EBITDA and net income.
  
• The closure of the Stickney, Illinois phthalic anhydride production could lead to stranded costs and charges, impacting net earnings and operating cash flow.
  
• Uncertainty in customer demand and economic conditions in some segments (e.g., Railroad Products and Services) can lead to variability in revenue and EBITDA projections.
  
• Potential tariff impacts and pricing volatility in raw materials, such as the copper hedging issue, present a risk to operating costs and net margins.

Valuation

• The analysts have a consensus price target of $59.5 for Koppers Holdings 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 $2.3 billion, earnings will come to $147.1 million, and it would be trading on a PE ratio of 9.7x, assuming you use a discount rate of 10.2%.
• Given the current share price of $30.68, the analyst price target of $59.5 is 48.4% 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.