Luxfer (LXFR)’s 2023 forecast belies strong growth ahead

Luxfer Holdings (LXFR) reported a strong end to 2022 with final quarter net sales up 18.2% year-over-year to $116.7 million. This comfortably topped his $101.3 million consensus view, and was boosted by his performance of the company’s Elektron and Gas Cylinders businesses, the company’s highest volume annual volume. We also believe that lower tax rates will help limit the continued negative impact on margins from higher input costs due to inflation, continuing to outpace pricing movements, increasing headcount with growth and some unfavorable production. difference increased adjusted earnings from continuing operations by 11%. It rose to 31 cents per share, which was in line with analyst expectations.

However, it looks like the impact of these ongoing cost headwinds will continue to trend a little higher than we would have liked. In addition to legal, interest and tax increases, this is expected to bring adjusted earnings from continuing operations to $1.15 to $1.35 per share for the current year, which is in line with consensus expectations for his It’s below $1.41. This lower-than-expected profit forecast for 2023 may be the cause of his LXFR share price drop today.

But what worries me less is the fact that this doesn’t appear to be the result of softening demand. Represents net sales of $66 million. This was well above analysts’ forecast of $417.3 million, reflecting continued demand from autocatalyst zirconium products, lightweight magnesium alloys, and the aerospace and automotive markets where in-cabin demand continues to grow. expected to be supported by a strong recovery. oxygen and expansion cylinders. In short, this strong top-line earnings growth should become more pronounced as current cost headwinds ease and margins begin to recover. This is probably a big reason why LXFR’s long-term adjusted earnings target of $2.00 per share by 2025 reflects compound annual growth of $1.25 to 26.5% per share expected this year. is. More than half of this target is due to margin recovery. From the normalization of the price/cost environment and the reduction of litigation costs from the current rate of increase.

I also think investors are overlooking the significant improvement in free cash flow production that LXFR saw in the final quarter of the year. This allowed the company to finish his 2022 with a very manageable net leverage ratio of just 1.1. More importantly, LXFR will continue to grow this year, supported by lower restructuring-related cash outlays and reduced working capital needs resulting from the easing raw material cost situation and overall healthier supply chain conditions. , expects to convert 100% of adjusted earnings into free cash flow. This suggests that free cash flow for 2023 will be between his $32 million and $37 million, which is about four times last year’s $7.5 million. Combined with the cash already on the books, LXFR will be able to fund all of its growth initiatives while also increasing its already generous dividend payout and repurchasing additional shares to further enhance shareholder value. In summary, today’s slide has only helped make the stock more attractive, and I believe the acceleration in earnings growth a little farther afield will be worth the wait.