ESCO’s FY25 print shows strong growth and order momentum, but valuation discipline still warranted

What happened

ESCO reported a very strong fiscal 4Q25 and FY25, with Q4 sales up 29% and adjusted EPS up 30%, and full‑year sales up 19% to $1.1B and adjusted EPS up 26% to $6.03. FY25 entered orders surged 57% to $1.6B, implying a well‑above‑1.0 book‑to‑bill and a significantly enlarged backlog that supports multi‑year revenue visibility across A&D, utility diagnostics, and RF/EMC test. The gap between GAAP EPS growth (+13%) and adjusted EPS growth (+26%) suggests underlying margin expansion, partially offset by acquisition‑related items and other non‑recurring costs. Relative to the prior DeepValue view, the print confirms that the recent acquisition and organic growth strategy is translating into higher scale and improved earnings power rather than near‑term disruption. However, the release does not yet address free‑cash‑flow normalization or deleveraging, which remain key for a stock already trading at a premium multiple versus diversified industrial peers.

Implication

For investors, the combination of 19% sales growth, 26% adjusted EPS growth, and a 57% increase in FY25 orders materially de‑risks the near‑term growth story and validates management’s organic plus M&A strategy. The robust order intake, with FY25 orders of $1.6B versus $1.1B of sales, indicates a healthy book‑to‑bill and should support continued top‑line expansion into FY26, especially in compliance‑critical niches like grid diagnostics and RF/EMC testing. That said, ESCO’s shares already trade at a premium on P/E and EV/EBITDA, so this upside surprise largely serves to defend the valuation rather than obviously cheapen it. Incremental upside from here will likely hinge on whether strong earnings growth translates into higher and more stable free cash flow and a clear path to bringing net debt/EBITDA back toward or below the 1.5x area. Positioning-wise, the setup favors existing holders who can stay patient while monitoring upcoming disclosures on cash flow, working capital, and leverage, whereas new capital may want to wait for either a better entry point or clearer proof of FCF and balance‑sheet improvement.

Thesis delta

The thesis moves modestly in a more constructive direction: the FY25 beat on growth and earnings, together with a 57% order surge and a well‑above‑1 book‑to‑bill, provides stronger evidence that ESCO can grow into its premium multiple through scale and margin expansion. However, the core caution around valuation, variable free‑cash‑flow conversion, and the need for visible deleveraging remains intact, as this release is light on cash‑flow and balance‑sheet detail. Net‑net, the stance stays effectively Neutral/Hold but with reduced execution risk and a somewhat higher bar for a bearish turn, while an upgrade case would still require clearer FCF and leverage progress in upcoming reports.