Electrifying Growth In Optical And EV Segments Sparks Future Revenue Gains

Key Takeaways

• Expansion into optical communications and EV charging infrastructure positions Fabrinet for significant future revenue growth.
  
• Increased operational capacity and telecom sector gains may boost revenue and improve margins.
  
• Strengthening Thai baht and component supply constraints pose risks to margins, revenue growth, and operational execution.

Catalysts

Provides optical packaging and precision optical, electro-mechanical, and electronic manufacturing services in North America, the Asia-Pacific, and Europe.

• Fabrinet's ongoing growth in the optical communications market, especially in AI applications and data center interconnect products, positions the company to capitalize on increasing demand, potentially boosting future revenue significantly.
  
• The expansion into EV charging infrastructure within the automotive segment indicates a strong revenue driver as the demand for electric vehicles and related infrastructure continues to grow.
  
• The construction of Building 10 is set to increase Fabrinet's operational footprint by more than 50%, which supports capacity expansion for future revenue growth and improved operating leverage.
  
• New business wins and share gains in the telecom sector, including advances in data center interconnect and traditional telecom systems, suggest increasing revenue opportunities and possibly improved margins from an expanded client base.
  
• Planned share repurchase activities, with $200 million authorized, could lead to EPS growth as outstanding shares are reduced, enhancing shareholder value.

Fabrinet Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fabrinet's revenue will grow by 14.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.3% today to 10.4% in 3 years time.
• Analysts expect earnings to reach $472.6 million (and earnings per share of $12.37) by about November 2027, up from $308.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $410 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.5x on those 2027 earnings, down from 29.6x today. This future PE is greater than the current PE for the US Electronic industry at 24.0x.
• Analysts expect the number of shares outstanding to grow by 1.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.05%, as per the Simply Wall St company report.

Fabrinet Future Earnings Per Share Growth

Risks

• The strengthening Thai baht is starting to exert pressure on gross margins, which could negatively affect net margins and earnings if not offset by operating leverage.
  
• The firm experiences foreign exchange revaluation losses due to currency fluctuations, specifically the Thai baht exchange rate, which could impact net income.
  
• The telecom segment has shown slow growth and has been a headwind, indicating potential ongoing challenges that could impact revenue growth and profitability in this area.
  
• Component supply constraints in new products like 1.6 terabit transceivers could pose risks to revenue growth and operational execution.
  
• The anticipated mix shift between 400 gig and 800 gig transceivers depends heavily on the main customer's adoption and needs, which could impact the company's datacom revenue if demand shifts unexpectedly.

Valuation

• The analysts have a consensus price target of $268.5 for Fabrinet 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 $300.0, and the most bearish reporting a price target of just $194.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.5 billion, earnings will come to $472.6 million, and it would be trading on a PE ratio of 26.5x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $252.0, the analyst's price target of $268.5 is 6.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.