AI Data Center Power Demand Will Support A Fairly Valued Long Term Story

Catalysts

About Babcock & Wilcox Enterprises

Babcock & Wilcox Enterprises provides power generation equipment, services and decarbonization technologies for utilities and industrial customers.

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

• Rising North American electricity demand tied to AI data center growth is feeding into record bookings, revenue and gross profit in Global Parts & Services, which directly supports future revenue and gross margin resilience in the core business.
• The limited notice to proceed with Applied Digital on a project valued at over US$1.5b and a data center opportunity pipeline of US$3b to US$5b is building multi-year visibility for large project work. This can lift backlog conversion, EBITDA and earnings as work progresses.
• The broader data center and baseload generation build out is aligning with B&W’s proven natural gas boiler and steam turbine configurations. The use of off the shelf designs with existing drawings may help contain project execution risk, support project margins and stabilize cash flow from large contracts.
• Growing interest in BrightLoop for low cost hydrogen and steam production and in ClimateBright and SolveBright for carbon capture and carbon credit monetization is creating an additional set of energy transition driven projects. These can add new revenue streams and support EBITDA diversification over time.
• Debt paydown of the 2026 bonds, recent equity raises and pro forma net debt of about US$113.2m, or 0.8x to 1.6x targeted 2026 EBITDA, point to lower interest expense and a stronger balance sheet. This can support earnings quality and financial flexibility as the US$10b to US$12b global project pipeline converts.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Babcock & Wilcox Enterprises's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -9.3% today to 2.8% in 3 years time.
• Analysts expect earnings to reach $21.2 million (and earnings per share of $0.17) by about January 2029, up from $-66.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $54.3 million in earnings, and the most bearish expecting $-8.4 million.
• 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 72.8x on those 2029 earnings, up from -14.0x today. This future PE is greater than the current PE for the US Electrical industry at 33.1x.
• 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 10.89%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is tying a large part of its long term story to AI data center power demand, including a US$1.5b Applied Digital project and a US$3b to US$5b AI opportunity pipeline. If AI related electricity needs or data center build outs slow or are met by alternative technologies, the expected uplift in backlog conversion and revenue may not materialize, which could pressure earnings and compress margins.
• Management is targeting US$70m to US$85m of adjusted EBITDA from the core business in 2026 and is highlighting an overall US$10b to US$12b project pipeline. If any of these large projects are delayed, cancelled or are awarded on less favorable commercial terms, the shortfall could weigh on revenue visibility, EBITDA delivery and ultimately net income.
• Although debt is being paid down and pro forma net debt is guided to about US$113.2m at 0.8x to 1.6x targeted 2026 EBITDA, the business still relies on bond markets, equity raises and an at the market program. Weaker capital markets or a lower share price could raise the cost of funding, affect interest expense and dilute earnings per share.
• The Applied Digital contract and similar opportunities require multi year execution, capacity from boiler fabrication partners and steam turbine suppliers, and project based revenue recognition using percentage of completion accounting. Supply chain constraints, execution issues or cost overruns could hurt project margins, delay cash inflows and weigh on operating income.
• BrightLoop, ClimateBright and SolveBright are being positioned for low cost hydrogen, steam and carbon capture projects, with potential deals in the US$70m to US$100m range and exposure to carbon credit markets. Slower policy support, weaker demand for carbon credits or technical and commercialization hurdles could limit these new revenue streams and keep group EBITDA and net margins below current expectations.

Valuation

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

• The analysts have a consensus price target of $8.33 for Babcock & Wilcox Enterprises 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 $10.0, and the most bearish reporting a price target of just $6.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $769.0 million, earnings will come to $21.2 million, and it would be trading on a PE ratio of 72.8x, assuming you use a discount rate of 10.9%.
  
• Given the current share price of $8.42, the analyst price target of $8.33 is 1.0% lower. 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.