Localization In China And Advanced Sensors Will Drive Future Success

Key Takeaways

• Localization of supply chain in China and innovative products could boost cost efficiencies, net margins, and future revenue growth.
  
• Growth in xEV, ADAS, and industrial markets, alongside cost optimization, may enhance future earnings and cash flow.
  
• Heavy reliance on the automotive sector amid sales decline and liquidity risks could limit Allegro's growth if current challenges persist.

Catalysts

Designs, develops, manufactures, and markets sensor integrated circuits (ICs) and application-specific analog power ICs for motion control and energy-efficient systems.

• Allegro MicroSystems is making progress in localizing its supply chain in China, with shipments from local OSAT partners beginning and expected volume expansion, potentially improving cost efficiencies and future revenue growth.
  
• Automotive industry estimates project flat production, but significant growth in xEV and ADAS adoption, areas where Allegro's content is higher, which can drive future revenue even if traditional auto production does not grow.
  
• Allegro is expecting a demand recovery in industrial markets fueled by an easing monetary and regulatory environment, potentially leading to increased revenue in this segment.
  
• Allegro reported the introduction of innovative products such as high accuracy inductive position sensors, micro power magnetic switches, and advanced current sensor ICs, which could contribute to enhancing net margins and future revenue.
  
• The company is actively working to optimize cost structures, including strategic Die Bank building and debt reduction strategies, which could improve long-term earnings and cash flow.

Allegro MicroSystems Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Allegro MicroSystems's revenue will grow by 11.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -8.5% today to 11.7% in 3 years time.
• Analysts expect earnings to reach $124.4 million (and earnings per share of $0.65) by about March 2028, up from $-65.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $150.7 million in earnings, and the most bearish expecting $63 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 47.0x on those 2028 earnings, up from -75.8x today. This future PE is greater than the current PE for the US Semiconductor industry at 29.4x.
• Analysts expect the number of shares outstanding to decline by 4.97% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.75%, as per the Simply Wall St company report.

Allegro MicroSystems Future Earnings Per Share Growth

Risks

• Allegro MicroSystems is experiencing a decline in sales, particularly in the automotive sector, which could impact future revenue and earnings growth if the pattern continues.
  
• The company's gross margins are under pressure due to anticipated annual pricing agreements and expected cost reductions not yet realized, which could affect net margins.
  
• Allegro relies significantly on the automotive sector, and stagnant industry growth or inventory management issues could limit revenue potential in the coming quarters.
  
• The company anticipates continued headwinds in Europe, which could materially affect regional revenue contributions and overall financials.
  
• Allegro's current strategic wafer and die bank could tie up cash flow, potentially impacting liquidity if inventory levels do not adjust as expected.

Valuation

• The analysts have a consensus price target of $28.8 for Allegro MicroSystems 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 $35.0, and the most bearish reporting a price target of just $23.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $124.4 million, and it would be trading on a PE ratio of 47.0x, assuming you use a discount rate of 8.7%.
• Given the current share price of $26.9, the analyst price target of $28.8 is 6.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.