Electrified Transportation And Grid Upgrades Will Drive Future Demand For Advanced Materials

Catalysts

About CPS Technologies

CPS Technologies develops advanced metal matrix composites and related engineered materials for high performance power electronics, defense and energy applications.

What are the underlying business or industry changes driving this perspective?

• Rising global investment in electrified transportation and grid upgrades, including high speed rail and data center driven power infrastructure, is driving sustained demand for CPS aluminum silicon carbide power module components, supporting continued double digit revenue growth.
• The planned move to a significantly larger, more efficient manufacturing facility funded by the recent capital raise should expand capacity and improve throughput. This positions CPS to leverage operating leverage and lift gross and operating margins.
• Expansion of federally funded SBIR and STTR programs across defense and energy, where CPS already holds multiple Phase 2 awards, provides a pipeline of commercializable technologies that can transition from research funding into higher margin product revenue.
• Broader adoption of advanced materials for lighter, more thermally efficient systems in defense platforms, nuclear applications and industrial electronics aligns with CPS QuickSet and radiation shielding solutions. This supports a mix shift toward differentiated products and higher net margins.
• Early commercial traction for ALMAX and growing awareness among new industrial and technology customers creates a stepwise volume opportunity. Modest initial orders can scale materially over time, enhancing earnings as fixed costs are absorbed over a larger revenue base.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming CPS Technologies's revenue will grow by 20.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.9% today to 12.3% in 3 years time.
• Analysts expect earnings to reach $6.5 million (and earnings per share of $0.36) by about December 2028, up from $-587.4 thousand today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 25.7x on those 2028 earnings, up from -103.5x today. This future PE is greater than the current PE for the US Electronic industry at 24.9x.
• 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 8.4%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• CPS is significantly exposed to U.S. federal research funding through multiple SBIR and STTR programs, so a prolonged government shutdown or shifting defense and energy priorities could slow new awards and delay topic releases, which would pressure long term revenue growth and earnings.
• The planned move to a larger manufacturing facility during 2026 is described as fundamentally disruptive, and if staged transfers, dual site operations or customer inventory buffers are not executed smoothly, CPS could face production interruptions, missed deliveries and cost overruns, which would hurt revenue and net margins.
• Recent growth has been driven heavily by a single long standing semiconductor customer and a new 15.5 million contract, so any slowdown in electrification, data center power investments or customer specific product demand could reduce follow on orders and weaken revenue growth and operating leverage.
• New product platforms such as ALMAX and radiation shielding are still in early adoption with small initial orders and lengthy validation cycles, so slower than expected commercialization or failure to convert research programs like controlled fragmentation warheads into volume production would limit the anticipated mix shift to higher margin products and constrain future net margins.
• Rising inventories, added engineering headcount and higher fixed costs from a much larger facility increase operating leverage to the downside, so if macro conditions, geopolitical risks or industry competition temper long term demand, CPS could see margin compression and weaker earnings despite higher capacity.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $6.0 for CPS Technologies based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $53.0 million, earnings will come to $6.5 million, and it would be trading on a PE ratio of 25.7x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $3.38, the analyst price target of $6.0 is 43.7% 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.