Asia Expansion And Operational Streamlining Will Strengthen Auto/EV Testing Capabilities

Key Takeaways

• The acquisition of Alfamation and operational expansions in key regions enhance market penetration and potential revenue growth.
  
• Streamlined consolidation and stock repurchase plan indicate confidence in improved margins and long-term EPS growth.
  
• Reliance on acquisitions and restructuring amidst market softness and tariff uncertainty may challenge revenue growth, profit margins, and cash flow.

Catalysts

Provides test and process technology solutions for use in manufacturing and testing in automotive, defense/aerospace, industrial, life sciences, security, and semiconductor markets worldwide.

• The Alfamation acquisition has contributed significantly to inTEST's recent sales growth, particularly in the Auto/EV sector, which is expected to support future revenue increases as these technologies continue to gain traction in advanced testing applications.
  
• The expansion of operations in Malaysia is projected to reduce costs related to supply chain and logistics, potentially enhancing net margins and market competitiveness.
  
• Streamlining operations by consolidating the Videology Netherlands facility into the U.S. operations is expected to result in annualized savings of approximately $500,000, improving operational efficiencies and positively impacting net margins starting in 2026.
  
• The company's recent expansion of sales resources and channel partners in key regions like Malaysia, Singapore, Vietnam, and Japan is anticipated to bolster revenue growth by increasing geographic reach and market penetration.
  
• The renewal of the stock repurchase plan signals management's confidence in long-term growth prospects, which, alongside operational improvements, could drive higher earnings per share (EPS) over time.

inTEST Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming inTEST's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.2% today to 4.8% in 3 years time.
• Analysts expect earnings to reach $7.3 million (and earnings per share of $0.58) by about April 2028, up from $2.9 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 28.0x on those 2028 earnings, up from 24.7x today. This future PE is greater than the current PE for the US Semiconductor industry at 23.2x.
• Analysts expect the number of shares outstanding to decline by 0.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.16%, as per the Simply Wall St company report.

inTEST Future Earnings Per Share Growth

Risks

• The company faces uncertainty due to tariffs, which might impact both supply chain relationships and market competitiveness, potentially affecting revenue and profit margins.
  
• The weakness in the industrial and auto markets, compounded by economic uncertainty, could negatively impact revenue growth and profit margins.
  
• The dependence on acquisitions, like Alfamation, to drive revenue growth highlights the risk of integration challenges and the inherent costs associated with such mergers, potentially impacting net earnings and cash flow.
  
• Ongoing restructuring efforts, such as the Videology consolidation, involve upfront costs that may impact short-term earnings and free cash flow.
  
• The softening in the front-end semi and auto/EV markets suggests a risk of declining or volatile revenue in those sectors, negatively impacting overall earnings growth.

Valuation

• The analysts have a consensus price target of $12.667 for inTEST 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 $15.0, and the most bearish reporting a price target of just $10.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $150.2 million, earnings will come to $7.3 million, and it would be trading on a PE ratio of 28.0x, assuming you use a discount rate of 10.2%.
• Given the current share price of $5.86, the analyst price target of $12.67 is 53.7% 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.