Aerospace And Healthcare Drive Growth Amid Rising Efficiency And Responsible Practices

Key Takeaways

• Expected revenue growth driven by strong demand in Aerospace, Healthcare/Life Sciences, and semiconductor sectors, enhancing future earnings.
  
• Strategic focus on manufacturing efficiency, cost reduction, and sustainable practices likely to boost operating margins, free cash flow, and appeal to conscious investors.
  
• Plexus faces risks from market share transition delays, execution risks from dependence on new products, and potential disruptions affecting growth and margins in targeted sectors.

Catalysts

Provides electronic manufacturing services in the United States and internationally.

• High anticipation of 9% to 12% revenue growth for fiscal 2025 due to early signs of demand increase, share gains, and new program ramps. This growth is expected to be driven by broad-based strength across sectors including Aerospace and Defense, Healthcare/Life Sciences, and improved semiconductor capital equipment and broadband communications demand, which should increase future earnings.
  
• Improved manufacturing efficiencies and cost reductions are predicted to elevate GAAP and non-GAAP operating margins to 5.5% and greater than 6% respectively by the end of fiscal 2025, positively impacting net margins.
  
• The company's strategy of increasing efficiency and reducing cost alongside progress on working capital initiatives is expected to continue generating solid free cash flow. This financial stability allows for potential share repurchases, which could contribute to EPS growth.
  
• Plexus’ emphasis on sustainable and responsible practices, including energy efficiency improvements and community engagement, positions the company favorably for growth among environmentally and socially conscious investors, potentially impacting long-term shareholder value.
  
• Solid wins and substantial customer recognition, notably in the Healthcare/Life Sciences sector with $279 million in revenue annually when fully ramped, indicate robust customer satisfaction and could lead to increased market share and higher revenues in the future, further driving up the stock value.

Assumptions

• Analysts are assuming Plexus's revenue will grow by 7.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.8% today to 4.5% in 3 years time.
• Analysts expect earnings to reach $219.7 million (and earnings per share of $7.94) by about September 2027, up from $110.9 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 19.4x on those 2027 earnings, down from 29.4x today. This future PE is lower than the current PE for the US Electronic industry at 21.6x.
• Analysts expect the number of shares outstanding to decline by 0.93% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.13%, as per the Simply Wall St company report.

Risks

• A slower-than-expected transition of a competitive market share gain within the aerospace and defense sector could lead to revenue performance below expectations in that market segment.
  
• Dependence on new product ramps and share gains for future growth may introduce execution risks, affecting revenue and operating margins if these do not materialize as planned.
  
• Possible disruptions in the industrial sector due to customer design revisions and regulatory delays could impact sequential revenue growth and affect gross margin performance.
  
• The projection of a mid-single-digit year-over-year revenue decline in the Healthcare/Life Sciences sector, due to component procurement at above market prices, may hint at margin pressures if cost reductions are not realized as expected.
  
• Supply constraints related to specific components in the Aerospace and Defense sector and customer design changes highlight risks to fulfilling projected growth and maintaining expected profitability levels.

Valuation

• The analysts have a consensus price target of $133.4 for Plexus 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 $145.0, and the most bearish reporting a price target of just $114.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.9 billion, earnings will come to $219.7 million, and it would be trading on a PE ratio of 19.4x, assuming you use a discount rate of 7.1%.
• Given the current share price of $119.79, the analyst's price target of $133.4 is 10.2% 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.