Wärtsilä Q2'25: A strong quarter loaded expectations to the share price

Translation: Original published in Finnish on 07/21/2025 at 08:54 am EEST

The second quarter offered better-than-expected order growth and strong earnings development, particularly driven by the Energy division. On the other hand, the company warned in its guidance that it will be difficult for the division to further increase order intake in the near future compared to the realized 12-month level. Near-term earnings-based valuation multiples have risen sharply; therefore, we lower the recommendation to Reduce (was Accumulate). We raise the target price to EUR 21.0 (was 18.5), supported by the easing of market uncertainties and the strengthening of Energy's long-term growth prospects.

New equipment sales orders and Q2 earnings exceeded expectations

Wärtsilä's Q2 report was very strong. Order intake grew by as much as 18% y/y, driven by new equipment sales (18% above consensus), especially in Energy. Energy’s large power plant order related to a US data center was announced earlier in the same week, which had not been updated to our or consensus forecasts, but even adjusted for this single order, order intake exceeded expectations. Service orders decreased by 6% due to project timing, but steadily growing contract-based services showed positive development. Revenue grew by 11% and adjusted EBIT was 207 MEUR, improving by 18% year-on-year and exceeding the consensus by 8%. Growth and earnings improvement were particularly evident in Energy, where order growth has been impressive (37%) over the past year. However, the order intake and revenue figures for the volatile and low-margin Energy Storage fell short of expectations.

The market is still favorable, but growing Energy's orders is becoming increasingly difficult

Like in Q1, Wärtsilä provided an upbeat demand outlook for Marine, where the company still sees good activity in its key segments and expects emission-related regulation to support demand for its solutions. The demand guidance for Energy was lowered. The company expects the demand environment for Energy to remain at the level of the comparison period over the next 12 months, which in our view reflects the challenging figures of the comparison period, especially considering the strong Q2. The demand guidance for Energy Storage is positive, which is partly explained by the rather weak order intake figures for the comparison period, in addition to the favorable market outlook (outside the US). The company mentions that global geopolitics and the threat of tariffs continue to cause uncertainty in forecasting, but so far, the key Marine and Energy segments have performed well and managed to pass on the 10% tariffs to prices for US customers. We made moderate 2-3% cuts to our adjusted EBIT forecasts (2025-27e) due to slightly weaker-than-expected service demand and recent small divestments. However, we see the company's long-term earnings growth profile as even slightly stronger, as the company has increased the footprint of engine power plants in the US market. Winning new equipment orders will also support the growth of service sales in the longer term.

Valuation has tightened clearly

Wärtsilä's investment profile is that of a value-creating company, thanks to its technological leadership, high return on capital (ROI 2024:  24%) and growth outlook supported by megatrends. On the other hand, the company's industries are cyclical, and the group's complex structure may partly depress the valuation level accepted by the market. Wärtsilä's share price has been on the rise in recent months, supported by factors such as the market attaching less importance to the uncertainties caused by US tariff policies and, on the other hand, the company's strong order intake. The current earnings-based valuation of the share, EV/EBIT of 15x and 13x with 2025 and 2026 estimates, is near the upper end of our fair value range (12-14x) and therefore does not offer upside to the valuation.