Cost Transformation And New Products Will Strengthen Future Performance

Key Takeaways

• Strategic cost transformation and deleveraging efforts are expected to enhance margins and profitability, aiming for significant cost savings and lower leverage.
  
• Introduction of new products and services, especially digital and AI tools, is anticipated to boost customer engagement and drive revenue growth.
  
• Challenges include foreign exchange impacts, divestiture effects, weak semiconductor demand, and uncertainties in academic and government sectors impacting revenue and profitability.

Catalysts

Engages in the provision of mission-critical products and services to customers in the biopharma, healthcare, education and government, advanced technologies, and applied materials industries in the Americas, Europe, Asia, the Middle East, and Africa.

• High single-digit organic growth in the bioprocessing business, driven by strong order intake and market recovery, is expected to support revenue growth in future periods.
  
• The introduction of new products and services, including cutting-edge digital tools and generative AI solutions, is anticipated to drive increased customer engagement and contribute to revenue growth.
  
• Significant strides in cost transformation initiatives are expected to drive margin expansion, with a target to reach an adjusted EBITDA margin of 18% to 19% in 2025.
  
• Achievement of over $250 million in cost savings run rate by the end of 2025, part of a multiyear transformation plan aimed at improving EBITDA margins and overall profitability.
  
• A focus on deleveraging, with a target net leverage below 3x, is expected to reduce interest expenses and improve net margins, ultimately supporting stronger earnings growth.

Avantor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Avantor's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.5% today to 9.7% in 3 years time.
• Analysts expect earnings to reach $704.2 million (and earnings per share of $1.1) by about March 2028, down from $711.5 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 29.5x on those 2028 earnings, up from 16.3x today. This future PE is lower than the current PE for the US Life Sciences industry at 39.0x.
• Analysts expect the number of shares outstanding to grow by 0.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.4%, as per the Simply Wall St company report.

Avantor Future Earnings Per Share Growth

Risks

• The bioscience production segment showed promising growth in bioprocessing, but the overall market relies on continued recovery and avoiding potential future destocking or disruption, which could impact revenue stability.
  
• The company faces a headwind from foreign exchange impacts due to its global operations, which could negatively affect reported revenue and earnings if currency fluctuations are unfavorable.
  
• The divestiture of the clinical services business resulted in a headwind to revenue and EBITDA margins, creating a potential strain on overall margins and reported earnings until growth offsets this loss.
  
• The semiconductor market's demand is currently weak, and any further instability could negatively impact the bioscience production segment's revenue growth and profitability.
  
• The academic and government sectors showed mixed performance, with uncertainties around NIH funding and macroeconomic factors potentially impacting revenue from these key customer bases.

Valuation

• The analysts have a consensus price target of $24.479 for Avantor 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 $31.0, and the most bearish reporting a price target of just $18.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.3 billion, earnings will come to $704.2 million, and it would be trading on a PE ratio of 29.5x, assuming you use a discount rate of 7.4%.
• Given the current share price of $17.01, the analyst price target of $24.48 is 30.5% 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.