Implementation Of COS And Arculus Expansion Will Boost Future Efficiency And Market Reach

Key Takeaways

• Implementation of COS is expected to boost operating margins and profitability through improved efficiency and execution.
  
• Significant growth potential in the metal credit card market could drive substantial long-term revenue growth.
  
• CompoSecure faces revenue instability and reduced margins due to economic pressures, investment impacts, and risks associated with financial instruments and global uncertainties.

Catalysts

Manufactures and designs metal, composite, and proprietary financial transaction cards in the United States and internationally.

• Implementation of the CompoSecure Operating System (COS) is expected to enhance efficiency and execution across all areas, potentially improving operating margins and long-term profitability.
  
• There is a significant growth opportunity in the metal credit card market due to CompoSecure's current penetration of less than 1%, which could drive substantial revenue growth.
  
• Acceleration in international sales, which grew 11% in 2024, highlights successful market expansion strategies likely to contribute to increased revenues and earnings in future years.
  
• Continued innovation and expansion in Arculus services, particularly in authentication and cold storage, are anticipated to contribute positively to revenue and EBITDA growth.
  
• Completion of the Resolute Holdings spin-off sets the stage for potential accretive M&A activities, which could diversify revenue streams and enhance company earnings.

CompoSecure Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CompoSecure's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -12.8% today to 42.4% in 3 years time.
• Analysts expect earnings to reach $221.0 million (and earnings per share of $2.12) by about April 2028, up from $-53.7 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 10.9x on those 2028 earnings, up from -20.0x today. This future PE is lower than the current PE for the US Tech industry at 12.1x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.26%, as per the Simply Wall St company report.

CompoSecure Future Earnings Per Share Growth

Risks

• CompoSecure's international sales show variability and risk, which can lead to unpredictable revenue streams and impact overall revenue stability.
  
• Gross margins have declined due to inflationary pressures on wages and materials, which could lead to reduced net margins and earnings.
  
• The company is making significant investments in strategic growth initiatives which are impacting adjusted EBITDA and could lead to initial declines in profitability.
  
• There are risks associated with managing fair value of warrant liabilities and other financial instruments, which have impacted net income, potentially creating further earnings volatility.
  
• Economic uncertainties such as global tariffs and consumer pressure pose risks to future revenue growth and operational costs.

Valuation

• The analysts have a consensus price target of $15.188 for CompoSecure 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 $17.0, and the most bearish reporting a price target of just $14.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $521.1 million, earnings will come to $221.0 million, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 8.3%.
• Given the current share price of $10.49, the analyst price target of $15.19 is 30.9% 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.