Digital Transformation And Rising Costs Will Undermine Lab Chemicals Sector

Key Takeaways

• Accelerating digital transformation and automation in labs threaten Avantor's core consumables business, risking product obsolescence and challenging revenue growth.
  
• Rising costs from supply chain disruptions, regulatory demands, and aggressive pricing strategies are compressing margins and heightening long-term earnings volatility.
  
• Securing major long-term contracts, ongoing digital transformation, robust bioprocessing demand, disciplined cost control, and experienced leadership position Avantor for sustained growth and improved 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.

• Avantor's core consumables and lab chemicals face significant risk from accelerating digital transformation in laboratory environments, as increased automation and AI-driven research shift demand away from traditional products, creating headwinds for revenue growth as their product base risks obsolescence.
  
• Persistent global supply chain vulnerabilities and deglobalization are driving up raw material and freight costs, while distribution inefficiencies further erode profitability, putting sustained downward pressure on gross margins and limiting Avantor's international growth aspirations over the long term.
  
• Intensifying regulatory scrutiny around ESG standards and chemical manufacturing is expected to increase compliance and audit costs, which will not only restrict certain product lines but also significantly compress net margins as the company struggles to absorb these rising operational expenses.
  
• Avantor's aggressive pricing tactics to secure key contract extensions and defend market share are eroding profitability, as the company concedes on pricing and offers upfront rebates, thereby locking in structurally lower margin rates and putting long-term EBITDA expansion at risk.
  
• The company's ongoing reliance on specialty biologics and emerging therapies for future growth is exposed to heightened volatility, as setbacks among a few large customers-driven by regulatory delays, failed clinical trials, or funding drops-create unpredictable revenue streams and amplify earnings risk for the quarters and years ahead.

Avantor Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Avantor compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Avantor's revenue will grow by 1.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 10.3% today to 6.6% in 3 years time.
• The bearish analysts expect earnings to reach $460.4 million (and earnings per share of $0.78) by about August 2028, down from $687.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 22.6x on those 2028 earnings, up from 12.8x today. This future PE is lower than the current PE for the US Life Sciences industry at 29.0x.
• 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 8.09%, as per the Simply Wall St company report.

Avantor Future Earnings Per Share Growth

Risks

• Avantor's recent success in securing long-term contract extensions with major global pharma and with BOI Business Solutions, resulting in over $100 million in expected incremental revenue, suggests that the company could see sustained top-line growth and higher market share as funding and biotech activity recover, potentially supporting higher future revenues.
  
• The ongoing digital transformation-including new platforms like Avantor Navigator and enhanced digital self-service tools-aims to improve customer experience, ordering efficiency, and pricing agility, all of which may contribute to higher customer retention, greater conversion rates, and ultimately an expansion in both revenues and operating margins over time.
  
• Despite short-term pressures, management reiterated confidence in the strength and long-term growth trajectory of the bioprocessing segment, driven by demand in monoclonal antibody platforms and emerging biologic modalities; if industry trends in personalized medicine and biologics persist, this could fuel above-market revenue growth for Avantor.
  
• Avantor's historically strong cash generation and cost control, evidenced by a 100% free cash flow conversion and ahead-of-plan progress on a $400 million multiyear cost transformation program, may enable improved net margins and free cash flow in the medium and long term.
  
• The leadership transition brings in a new CEO with over 30 years of industry experience, notably in bioprocessing, which could lead to renewed strategic focus, improved operational execution, and enhanced competitive positioning-potentially resulting in long-term improvements in both earnings and profitability.

Valuation

• The assumed bearish price target for Avantor is $12.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Avantor's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• 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 bearish analysts, you'd need to believe that by 2028, revenues will be $6.9 billion, earnings will come to $460.4 million, and it would be trading on a PE ratio of 22.6x, assuming you use a discount rate of 8.1%.
• Given the current share price of $12.93, the bearish analyst price target of $12.0 is 7.7% lower.
• 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.