Refreshing Core Offerings And Forming Partnerships Will Open New Markets

Key Takeaways

• FARO Technologies aims to drive revenue growth through refreshed solutions, new products, and strategic partnerships to expand market access and customer share.
  
• Continuous operational improvements are enhancing margins, contributing to operating leverage, and supporting earnings growth over time.
  
• Challenges in key regions, FX headwinds, and reliance on non-GAAP measures threaten revenue growth and margin clarity amidst geopolitical and economic uncertainties.

Catalysts

Designs, develops, manufactures, markets, and supports software driven three-dimensional measurement, imaging, and realization solutions worldwide.

• FARO Technologies plans to capitalize on its operational excellence through three organic growth initiatives: refreshing core solutions, expanding the addressable opportunity with new offerings, and forming strategic partnerships. This is expected to drive revenue growth beyond market rates.
  
• The successful launch of new products such as the Leap ST Handheld Scanner and refreshed core product lines is expected to grow revenue by increasing FARO's share of customer wallet and providing more tailored solutions to their needs.
  
• Strategic partnerships, such as the multiyear collaboration with Topcon and an OEM partnership in the 3D metrology sector, aim to expand FARO's reach and distribution, potentially boosting revenue through wider market access and increased scale.
  
• FARO's focus on continuous operational improvements has led to increased gross and EBITDA margins, and these efforts are expected to continue contributing to operating leverage, improving net margins and earnings over time.
  
• The introduction of solutions that align closely with FARO's core business and strong brand loyalty is likely to lead to higher commercial success and revenue growth, as these solutions directly address customer needs and remain within established markets.

FARO Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FARO Technologies's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.6% today to 4.5% in 3 years time.
• Analysts expect earnings to reach $17.1 million (and earnings per share of $1.29) by about April 2028, up from $-9.1 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 50.6x on those 2028 earnings, up from -51.8x today. This future PE is greater than the current PE for the US Electronic industry at 19.3x.
• Analysts expect the number of shares outstanding to decline by 1.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.72%, as per the Simply Wall St company report.

FARO Technologies Future Earnings Per Share Growth

Risks

• Ongoing challenges in specific regions, such as commercial construction weaknesses in China and Germany, could negatively impact revenue and market demand.
  
• The FX headwinds, particularly the strengthening of the U.S. dollar, adversely affected revenue and could continue to pressure gross margins.
  
• Year-over-year revenue declines across key regions (5% in the Americas, 2% in Europe, and over 11% in Asia Pacific) highlight geopolitical and economic vulnerability, impacting overall revenue growth.
  
• Prolonged tariff uncertainties and potential government spending slowdowns pose risks to revenue and operational costs, affecting bottom-line performance.
  
• The company's non-GAAP financial measures indicate reliance on adjustments for presenting financial performance, which can obscure the actual impacts on net margins and earnings if normalized under GAAP standards.

Valuation

• The analysts have a consensus price target of $38.5 for FARO Technologies based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $381.0 million, earnings will come to $17.1 million, and it would be trading on a PE ratio of 50.6x, assuming you use a discount rate of 7.7%.
• Given the current share price of $24.76, the analyst price target of $38.5 is 35.7% 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.