Investments In Aerospace And Defense Will Expand Market Presence By 2026

Key Takeaways

• Tariffs on steel products and new energy programs are expected to boost domestic demand and future revenue streams.
  
• Investments in aerospace, defense, and facility modernization aim to enhance revenue, efficiency, and earnings.
  
• Persistent weak demand, high costs, tariffs, price negotiations, and pension obligations pose risks to Metallus's revenue, margins, and liquidity.

Catalysts

Manufactures and sells alloy steel, and carbon and micro-alloy steel products in the United States and internationally.

• The imposition of tariffs on steel long products and derivatives is expected to reduce imports and increase domestic demand, positively impacting revenue.
  
• Metallus plans to launch new energy programs that leverage advanced materials, targeting $20 million in annual sales by 2026, thereby increasing future revenue streams.
  
• Strategic investments in the aerospace and defense sectors are projected to grow sales in this end market to over $250 million by 2026, enhancing overall revenue and earnings.
  
• The company's capital allocation strategy, including share repurchases and investments in automation and safety, is likely to improve net margins and future earnings.
  
• Ongoing government funding and CapEx investments in modernizing facilities are expected to drive operational efficiency, reducing costs and potentially improving net margins and profitability in the long term.

Metallus Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Metallus's revenue will grow by 8.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.1% today to 8.8% in 3 years time.
• Analysts expect earnings to reach $122.5 million (and earnings per share of $2.86) by about March 2028, up from $1.3 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 7.5x on those 2028 earnings, down from 459.1x today. This future PE is lower than the current PE for the US Metals and Mining industry at 19.7x.
• Analysts expect the number of shares outstanding to decline by 3.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.36%, as per the Simply Wall St company report.

Metallus Future Earnings Per Share Growth

Risks

• The company experienced persistent weak market demand in 2024, which negatively affected its profitability despite strategic changes, indicating potential future risks to revenue and net margins if demand does not recover sustainably.
  
• There are concerns about higher manufacturing costs and lower cost absorption affecting financial performance, which could impact earnings if efficiencies and demand do not improve as expected.
  
• Expected tariffs on steel products, although intended to boost domestic demand, could introduce market volatility and uncertainty, which might affect short-term revenue and profit margins if the trade environment changes unexpectedly.
  
• The company faces an anticipated decrease in average base price per ton in 2025, driven by customer price negotiations, which could impact revenue and net margins, especially if costs continue to rise or remain high.
  
• A significant pension contribution requirement of $65 million in 2025, heavily weighted to the first quarter, poses a liquidity risk and could affect cash flow and earnings, especially if operating cash flow does not improve as projected.

Valuation

• The analysts have a consensus price target of $20.0 for Metallus 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 $1.4 billion, earnings will come to $122.5 million, and it would be trading on a PE ratio of 7.5x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $14.17, the analyst price target of $20.0 is 29.2% 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.