Hexagon jumps 3% as J.P. Morgan sees earnings upside from recovering demand

Swedish measurement technology company Hexagon AB Class B (ST:HEXAb) experienced a 3% surge in its shares on Friday following J.P. Morgan's upgrade to an "overweight" rating. The brokerage firm attributed this positive sentiment to the recovering end markets that they believe will propel Hexagon's earnings above expectations. J.P.

Morgan has increased its price target for Hexagon from SEK 90 to SEK 125, which is approximately 25% higher than the stock's close on October 8, which was SEK 101.30. Hexagon's core business, which excludes robotics and the spun-off software unit Octave, has grown by 8% in the first quarter and 12% in the second quarter as most end markets expanded, with notable growth in aerospace and defense, electronics, and general manufacturing.

The broker's projections indicate that Hexagon's core business could see about 9% annual sales growth, exceeding the company's guidance of 4% to 6%. Furthermore, J.P. Morgan forecasts that Hexagon's 2027 and 2028 earnings will be mid-single-digit percentage points above consensus expectations. In support of this valuation, J.P. Morgan highlights two potential factors that could drive Hexagon's stock price higher.

Firstly, Chairman Bjorn Rosengren, who assumed the position in April, has managed to improve profit margins at Hexagon's subsidiaries Wartsila, Sandvik, and ABB by an average of around 450 basis points. If similar improvements can be achieved at Hexagon, it could potentially add about 15% to the stock price. Secondly, J.P. Morgan mentions the potential value of Hexagon's humanoid robot business, currently without revenue.

The broker estimates the value of this unit to be between 4 billion and 5 billion euros, which could contribute an additional 15% to 20% to Hexagon's share price. The robotics division is expected to commercialize its AEON robot by late 2026, with an annual investment of approximately €50 million. J.P. Morgan maintains a valuation of Hexagon's shares at about 21 times enterprise value to operating profit, which is slightly above its 10-year average of 20 times.

The broker also forecasts adjusted earnings per share of €0.36 for 2026, down from €0.32, and €0.31 for 2027, down from €0.33. However, Hexagon continues to face challenges in the automotive, 10% of sales, and construction, 27% of sales, which remain "difficult for now." The broker identifies two main risks: rising interest rates could potentially slow demand and negatively impact revenue and earnings, and the investment in the humanoid robot business may not yield a positive return.