AVTR: Activist Pressure And Business Overhaul Will Drive Share Recovery

Key Takeaways

• Strong demand from pharma and biotech, coupled with innovation and digital transformation, positions Avantor for sustained revenue and customer growth.
  
• Cost transformation and investment in specialized solutions are set to drive margin improvement and capitalize on higher-value market segments.
  
• Aggressive price cuts, bioprocessing setbacks, and margin pressures amid weak demand and high leverage threaten profitability, growth prospects, and financial flexibility.

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.

• The global growth in demand for biopharmaceuticals and healthcare solutions is being reinforced by Avantor's major contract wins and extensions with large pharma and biotech consortia. These positions Avantor to capture greater market share as end-market funding and patient procedures return to normalized or higher levels, creating sustained potential for above-market revenue growth.
  
• Increasing investments in R&D, both in established regions and emerging markets, are expanding demand for laboratory consumables and specialized production materials. Avantor's ongoing product innovation and digital transformation (such as proprietary AI-powered product discovery and seamless digital buying platforms) are expected to drive improved customer retention, new customer wins, and long-term revenue expansion.
  
• Avantor's multi-year cost transformation initiative, targeting $400 million in run-rate savings by 2027, coupled with operational efficiency measures and digital infrastructure upgrades, is likely to drive significant margin expansion and enhance free cash flow in coming years, offsetting current competitive pricing pressures.
  
• The continued acceleration of biologics, gene therapies, and personalized medicine creates an increasing need for specialized and single-use solutions-an area where Avantor is investing in market-leading platforms and expanding innovation, positioning the company to benefit from secular end-market growth and product mix shift toward higher-margin segments, supporting margin and earnings growth.
  
• The current pricing strategy to gain/secure large enterprise contracts is temporarily pressuring margins but is expected to pay off as higher volumes drive better operating leverage and customer lock-in. When end-market growth returns and new share gains mature, net margins and earnings have substantial room to recover and expand.

Avantor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Avantor's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.3% today to 6.4% in 3 years time.
• Analysts expect earnings to reach $461.3 million (and earnings per share of $0.86) by about August 2028, down from $687.4 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 26.6x on those 2028 earnings, up from 11.1x today. This future PE is lower than the current PE for the US Life Sciences industry at 32.3x.
• Analysts expect the number of shares outstanding to grow by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.18%, as per the Simply Wall St company report.

Avantor Future Earnings Per Share Growth

Risks

• Intensifying competitive pressures in the laboratory solutions segment are leading Avantor to aggressively cut prices and offer upfront rebates to secure large contract extensions, compressing gross and EBITDA margins and raising the risk of prolonged profitability declines.
  
• Persistent headwinds in the bioprocessing business-including elongated customer recoveries in new modalities (gene therapy, mRNA), regulatory uncertainties, and unexpected large customer-specific setbacks-have resulted in bioprocessing revenue being flat year-over-year instead of delivering expected high-single-digit growth, pointing to vulnerability in both top-line growth and long-term market share.
  
• Guiding for negative to flat organic revenue growth in 2025 and acknowledging continued macro-driven funding and policy headwinds across major end markets (biotech, academia, large pharma) highlights the ongoing risk that weak industry demand and slow recovery may constrain revenues for several more years.
  
• Margin pressures are being amplified by unfavorable product mix, elevated supply chain expenses, and under-absorption of fixed costs due to less-than-expected volume growth, which are offsetting cost efficiency gains and threatening future earnings and free cash flow.
  
• The company's elevated net leverage (3.2x adjusted EBITDA) and reduced free cash flow guidance, exacerbated by upfront contract rebates, could limit financial flexibility and deleveraging progress, particularly in an environment where interest rates remain high or the competitive environment further compresses margins.

Valuation

• The analysts have a consensus price target of $14.118 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 $19.0, and the most bearish reporting a price target of just $12.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.2 billion, earnings will come to $461.3 million, and it would be trading on a PE ratio of 26.6x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of $11.18, the analyst price target of $14.12 is 20.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.