FDA Approval And Global Expansion Will Unlock New Markets

Key Takeaways

• Expanding U.S. FDA approval and entry into new markets like Canada drive key growth opportunities and revenue potential.
  
• Enhanced inventory management and cost optimization improve margins, boosting profitability and financial stability.
  
• Delayed FDA approval and compliance issues present significant risks to U.S. market expansion and revenue growth amid weak consumer sentiment.

Catalysts

Engages in the manufacture and sale of various infant nutrition and wellbeing products in Australia, China, the United States, and internationally.

• Bubs Australia is on track for permanent FDA approval in the U.S. by October 2025, which will provide access to the world's second-largest IMF market and support long-term revenue growth.
  
• The company has expanded its market presence in China, the world's largest infant formula market, with significant revenue growth in the CBEC channel, indicating potential future revenue increases.
  
• Bubs is investing in new high-margin pack formats, particularly in the U.S., which are expected to sell for 10% more than existing SKUs, potentially enhancing gross profit margins.
  
• Bubs plans to expand into the Canadian market, which has temporary approval, and expects to launch FY '26, providing another avenue for revenue growth.
  
• The company focuses on strong inventory management and cost optimization, resulting in improved gross margins and reduced operating costs as a percentage of revenue, potentially increasing future net margins and profitability.

Bubs Australia Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bubs Australia's revenue will grow by 20.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -11.0% today to 7.9% in 3 years time.
• Analysts expect earnings to reach A$12.2 million (and earnings per share of A$0.01) by about July 2028, up from A$-9.8 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$4.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.1x on those 2028 earnings, up from -16.0x today. This future PE is lower than the current PE for the AU Food industry at 24.5x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.41%, as per the Simply Wall St company report.

Bubs Australia Future Earnings Per Share Growth

Risks

• Consumer sentiment in the U.S. market is weakening, which could impact future revenue growth despite current positive trends. (Revenue)
  
• The rollout of new pack formats in the U.S. impacted sales temporarily, suggesting potential risks in execution and inventory challenges. (Revenue, Gross Margins)
  
• There is a possibility of tariffs or a VAT-like tax being imposed on Australian goods by the U.S., which could dampen volume and demand, affecting revenue and margins. (Revenue, Net Margins)
  
• The FDA approval process for permanent market access in the U.S. is a few months behind schedule, posing a potential risk if approval is delayed or denied. (Revenue, Market Expansion)
  
• Sales through Amazon were temporarily suppressed due to compliance issues, pointing to operational risks in e-commerce channels. (Revenue, Operational Efficiency)

Valuation

• The analysts have a consensus price target of A$0.182 for Bubs Australia based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$0.2, and the most bearish reporting a price target of just A$0.14.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$153.4 million, earnings will come to A$12.2 million, and it would be trading on a PE ratio of 16.1x, assuming you use a discount rate of 6.4%.
• Given the current share price of A$0.18, the analyst price target of A$0.18 is 3.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.