Cost Transformation And Tactical Divestitures Set To Propel Innovation And Revenue Growth

Key Takeaways

• Strategic divestitures and cost transformation enhance growth focus, improve margins, and reduce debt, positively impacting earnings.
  
• New product launches, partnerships, and improved operations drive revenue growth, while accelerating debt paydown reduces interest expenses.
  
• The cautious spending environment and setbacks in key segments point to potential challenges in sustaining Avantor's future revenue growth.

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.

• Avantor's ongoing cost transformation initiative is delivering significant savings ahead of schedule, with a target to exceed $75 million in savings for 2024 and aiming for $150 million in run-rate savings, which is expected to positively impact net margins and earnings.
  
• The divestiture of clinical services assets will allow Avantor to focus on higher growth and lower capital investment areas in laboratory and production platforms, potentially enhancing margins and reducing debt, thus positively impacting earnings and net margins.
  
• The launch of new products and expansion of existing ones, such as the Magnetic Mixing System's portfolio and new partnerships with companies like Agilent and Oxford Nanopore, are anticipated to drive revenue growth through innovation and increased market penetration.
  
• Avantor's improved free cash flow performance, facilitated by strong operational execution and strategic asset divestiture, is enabling accelerated debt paydown and deleveraging efforts, which should positively influence earnings by reducing interest expenses.
  
• The ongoing commercial intensity and improvements in order momentum in key segments like bioprocessing and Laboratory Solutions could lead to mid
• to high single-digit growth in these areas, potentially boosting revenue and earnings in upcoming quarters.

Avantor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Avantor's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 11.2% in 3 years time.
• Analysts expect earnings to reach $846.6 million (and earnings per share of $1.24) by about October 2027, up from $309.6 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 26.8x on those 2027 earnings, down from 49.5x today. This future PE is lower than the current PE for the US Life Sciences industry at 36.9x.
• Analysts expect the number of shares outstanding to grow by 0.05% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Avantor Future Earnings Per Share Growth

Risks

• Organic revenue declined 0.7% year-over-year, indicating potential challenges in sustaining growth, which could impact future revenue streams for the company.
  
• The cautious spending environment in biopharma and healthcare may continue to exert pressure on the Laboratory Solutions segment, potentially affecting revenue and net margins.
  
• Advanced Technologies sales were below plan, particularly due to headwinds in the U.S. semiconductor market, which may negatively affect revenues in this segment.
  
• The impact of the clinical services divestiture is expected to be $200 million annually, which could dilute future revenue expectations and may also affect earnings given the outlined EBITDA margin impact.
  
• Biotech funding hasn't yet translated into increased preclinical spending, indicating potential continued softness in this customer base, which could affect future revenue growth trajectories.

Valuation

• The analysts have a consensus price target of $27.31 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 $33.0, and the most bearish reporting a price target of just $24.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.6 billion, earnings will come to $846.6 million, and it would be trading on a PE ratio of 26.8x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $22.52, the analyst's price target of $27.31 is 17.5% 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.