Grid Modernization And Defense Spending Will Support This Undervalued Supplier’s Long-Term Potential

Catalysts

About Ralliant

Ralliant provides test, measurement, sensor and safety systems used across defense, utilities, industrial manufacturing, electronics and semiconductor applications.

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

• Sustained investment in grid modernization and reliability, tied to electrification and data center build outs, supports continued demand for Qualitrol condition monitoring solutions, which can help underpin revenue growth and support high segment margins in Sensors & Safety Systems.
• Growing global defense and space spending, including missile program replenishment and backlog growth at PacSci EMC, reinforces Ralliant's role as an embedded supplier, which can provide multi year visibility for Sensors & Safety Systems revenue and support cash flow stability.
• Rising electronics content across industries and increasing AI data center and robotics applications are expanding test requirements, and Tektronix platforms in communications and power electronics are positioned to capture more of this activity, which can support Test & Measurement revenue and incremental EBITDA margins.
• Company wide use of the Ralliant Business System, now being augmented with AI, targets faster proposal cycles, better supply chain performance and higher manufacturing productivity, which can help offset cost inflation and support adjusted EBITDA margin resilience.
• Planned growth focused CapEx at 2% to 3% of revenue and reinvestment of 50 to 100 basis points of margin into commercial, innovation and manufacturing initiatives are aimed at expanding capacity in defense and utilities and accelerating product refresh cycles, which can support medium term revenue growth and earnings power.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Ralliant's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -59.1% today to 11.8% in 3 years time.
• Analysts expect earnings to reach $284.0 million (and earnings per share of $2.5) by about February 2029, up from $-1.2 billion 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 26.4x on those 2029 earnings, up from -3.6x today. This future PE is lower than the current PE for the US Electronic industry at 27.4x.
• Analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.06%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The goodwill impairment linked to EA Elektro-Automatik following weaker electric vehicle demand and lower industry forecasts highlights that parts of Test & Measurement are exposed to end markets where long-term growth expectations can reset lower, which could weigh on revenue and segment earnings if similar reassessments occur elsewhere.
• Management has already revised long-term revenue and operating profit expectations lower for the EA business. If EV-related and other energy storage demand remains below prior assumptions, the Test & Measurement segment may not reach the profit levels implied in current forecasts, putting pressure on adjusted EBITDA margins and overall earnings.
• The Test & Measurement segment reported Q4 revenue of US$217 million with a 6% year-over-year decline and margin pressure from lower volume and higher employee costs. If diversified electronics and semiconductor orders do not translate into a sustained recovery, that segment could continue to drag on consolidated revenue growth and net margins.
• China is described as an area where expectations have been lowered, with ongoing pressure from export controls and a reduced growth outlook for electronics. If this persists, it could limit longer-term growth in both Test & Measurement and Sensors & Safety Systems, constraining revenue and earnings versus more optimistic scenarios tied to global secular trends.

Valuation

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

• The analysts have a consensus price target of $51.0 for Ralliant 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 $65.0, and the most bearish reporting a price target of just $41.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $2.4 billion, earnings will come to $284.0 million, and it would be trading on a PE ratio of 26.4x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $39.52, the analyst price target of $51.0 is 22.5% 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.