Arculus Technology And Global Expansion Will Drive Future Profit Growth

Key Takeaways

• Simplifying the share structure and eliminating tax distributions is set to boost cash flow, enhancing financial stability.
  
• Strategic M&A and international sales growth are driving revenue increases and market expansion opportunities.
  
• Investments in culture, M&A, and capability enhancements may lower margins amid sales slowdown and competitive challenges from digital wallets and talent costs.

Catalysts

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

• The Resolute transaction, which simplified CompoSecure's dual-class share structure and eliminated tax distributions, is expected to enhance free cash flow by approximately $20 million annually, impacting cash flow positively.
  
• The company is reinvigorating organic growth and diversifying its business through accretive M&A, which could lead to increased revenues and market expansion.
  
• The international market has shown strong performance, with net sales growth and a doubling of international sales. This momentum is expected to support future revenue growth.
  
• The Arculus platform's technology is poised to make an impact on fraud reduction, with anticipated profitability by 2025, potentially improving future earnings and margins.
  
• With strong long-term contracts and a robust pipeline centered on innovation, the company anticipates improvements in supply chain stability and consistent material costs, which could positively impact cost management and net margins.

CompoSecure Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CompoSecure's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.1% today to 95.6% in 3 years time.
• Analysts expect earnings to reach $488.7 million (and earnings per share of $11.88) by about December 2027, up from $-13.0 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 1.9x on those 2027 earnings, up from -108.0x today. This future PE is lower than the current PE for the US Tech industry at 26.6x.
• Analysts expect the number of shares outstanding to decline by 22.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.89%, as per the Simply Wall St company report.

CompoSecure Future Earnings Per Share Growth

Risks

• The company's investment in building a high-performance culture and enhancing operating capabilities requires additional expenses, which could reduce net margins in the short term while awaiting future benefits.
  
• An anticipated deceleration in sales growth into 2025 driven by early forecasts of slower than previous years' revenue increases could impact overall earnings.
  
• The ongoing need to invest in M&A infrastructure and capabilities implies increased fixed costs, potentially affecting profit margins if not carefully managed alongside revenue growth.
  
• The competition in the metal card industry and the rising use of digital wallets might pose challenges to sustained revenue growth if not addressed through innovation and differentiation.
  
• Labor cost increases and competition for talent present risks to maintaining net margins if wage pressures and talent retention issues aren't managed effectively.

Valuation

• The analysts have a consensus price target of $17.94 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 $23.0, and the most bearish reporting a price target of just $14.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $511.1 million, earnings will come to $488.7 million, and it would be trading on a PE ratio of 1.9x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $15.92, the analyst's price target of $17.94 is 11.2% 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.