Hexagon Upside After Q2 - Strong Results In A Tricky Market

Hexagon (OTCPK:HXGBY) delivered solid 2Q25 results, reporting positive YoY organic growth, an adjusted gross margin exceeding 66%, and an EBIT margin over 25% despite FX headwinds. Strategically, the company plans to separate its Octave segment by early 1H26, initiated a cost improvement program, acquired aerial mapping firm APEI to enhance geospatial capabilities, and divested non-core SIG assets to sharpen focus on public safety software. The author maintains a 'BUY' rating, raising the price target to 110 SEK/share, citing Hexagon's robust fundamentals, unique market position, and anticipated double-digit EPS growth from 2026, justifying a premium valuation for a potential 15%+ annualized return despite a forecasted 2025 EPS decline.

Analysis

Hexagon (OTCPK:HXGBY) demonstrated fundamental strength in its 2Q25 results, delivering positive year-over-year organic growth, an adjusted gross margin above 66%, and an operating (EBIT) margin exceeding 25%. This performance was achieved despite significant foreign exchange headwinds, which negatively impacted the operating margin by 130 basis points due to the company's exposure to the EUR/USD. Management is actively reshaping the portfolio through several strategic initiatives, including a planned separation of its Octave segment in H1 2026, the divestment of approximately €90 million in revenue from non-core assets in the SIG division to focus on public safety software, and the acquisition of French aerial mapping firm APEI to bolster its geospatial capabilities. Although a decline in EPS is forecast for fiscal 2025, a strong rebound with double-digit growth is projected for 2026-2027. The investment case is predicated on the company's unique market position and its ability to sustain a premium valuation, with the stock trading at a P/E of approximately 22.8x, which is considered justified by its hard-to-replicate product suite and long-term growth outlook.

Key Decisions for Investors

• Given the strong operational results, strategic portfolio sharpening, and significant long-term EPS growth forecast for 2026-2027, investors with a tolerance for premium valuations might find the stock attractive for its potential market-beating returns.
• The primary risk is the stock's high valuation premium; therefore, investors must closely monitor the company's ability to achieve the projected double-digit EPS growth rebound in 2026 to justify current multiples and prevent potential contraction.
• Key factors to watch include the successful execution of the Octave segment separation, margin improvements from the forthcoming cost program, and the persistent negative impact of foreign exchange rates on profitability.