Luxfer’s (LXFR) 2023 Forecast Belies The Strong Growth That Lies Farther Ahead

Brussels: Refrigerant gas cylinders under pressure of the Luxfer brand ready to transport in Brussels, Belgium


Luxfer Holdings (LXFR) reported a solid end to 2022 with net sales in the final quarter climbing 18.2% year-over-year to $116.7 million. That comfortably exceeded the $101.3 million consensus view and was driven by the best volume performances of the year from both the company’s Elektron and Gas Cylinders businesses. And with a lower tax rate helping to limit the ongoing negative impact on margins from inflation-driven input cost increases continuing to outpace its own pricing actions, growth-related headcount increases and some adverse production variances, adjusted earnings from continuing operations grew by 11% to 31 cents per share, which were in line with what analysts were expecting.

However, it appears that the impact from these ongoing cost headwinds will continue to trend a bit higher than we were hoping for. And along with greater legal, interest and tax expense, this is expected to result in adjusted earnings from continuing operations of $1.15-1.35 per share for the current year, which falls short of the $1.41 consensus estimate. This softer-than-expected profit forecast for 2023 is likely what drove LXFR’s stock lower today.

Yet what has me less concerned is the fact that this doesn’t appear to be a product of softening demand. To the contrary, LXFR’s guidance for top-line growth of 6-10% implies net sales of $449-466 million. That’s much higher than the $417.3 million analysts are projecting and is expected to be supported by the ongoing recovery in demand from the aerospace and automotive markets that should continue to fuel greater demand for its auto catalyst zirconium products, lightweight magnesium alloys, and in-cabin oxygen and inflation cylinders. That means as its current cost headwinds ease and margins begin to recover, the profit growth from this stronger top line should be more pronounced. This is probably a big reason why LXFR’s longer-range target for adjusted earnings of $2.00 per share by 2025 reflects compounded annual growth of 26.5% from the $1.25 per share anticipated this year—with more than half of this goal coming from the recovery in margins from the normalizing of the price/cost environment and the reduction in legal expenses from their current elevated rate.

I also think investors are overlooking the substantial improvement in free cash flow production that LXFR saw in the final quarter of the year with the $15.9 million generated being the highest in nine quarters. This allowed the company to end 2022 with a very manageable net leverage ratio of just 1.1. More importantly, aided by lower restructuring-related cash expenditures and reduced working capital needs stemming from an easing raw material cost landscape and healthier supply chain conditions overall, LXFR expects to convert 100% of its adjusted earnings into free cash flow this year. That suggests free cash flow of $32-37 million in 2023, which is roughly four times higher than the $7.5 million generated last year. Combined with the cash already on its books, this even allows LXFR to further add to shareholder value by increasing its already generous dividend payment and repurchasing additional shares, while still funding all its growth initiatives. Collectively, this has me believing that today’s slide only served to make the stock more attractive and that the acceleration in earnings growth that lies slighter farther out will be well worth the wait.

Taesik Yoon, CFA is the editor of the Forbes Special Situation Survey and Forbes Investor investment newsletters. Luxfer Holdings (LXFR) is a current recommendation in the Forbes Investor. To access this and the other stocks being recommended through the Forbes Investor, click here to subscribe.

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