Resilient Fishing Demand And Cost Efficiencies Will Support Improving Long Term Earnings

Catalysts

About Rapala VMC

Rapala VMC designs, manufactures and distributes fishing tackle and winter sports equipment to global recreational and sport anglers.

What are the underlying business or industry changes driving this perspective?

• Resilient North American participation in recreational fishing, supported by favorable fishing conditions and strong winter seasons, is sustaining robust demand for key brands and is described as underpinning mid single digit revenue growth and operating leverage in the medium term.
• Reorganized European operations, including head count reductions, excom streamlining and a more stable supply chain, are structurally lowering the cost base and are expected to support gradual expansion of net margins even in a flat or slightly declining sales environment.
• Successful relaunches and extensions such as the 13 Fishing range, CrushCity soft plastics and Okuma in Europe demonstrate ongoing product innovation and brand strength, which is cited as helping Rapala capture mix driven pricing power and support earnings growth despite tariff pressures.
• Improved inventory composition and better inventory turns after the post COVID digestion phase, together with disciplined capital expenditure, are described as positioning the company to convert a higher share of EBITDA into free cash flow, strengthening the balance sheet and reducing net interest expense over time.
• Management’s proactive tariff mitigation measures, including earlier procurement, selective price increases and vendor negotiations, along with supportive big box retail relationships, are viewed as likely to limit gross margin erosion and protect operating profit as trade terms evolve in 2025 and 2026.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Rapala VMC's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.1% today to 2.8% in 3 years time.
• Analysts expect earnings to reach €6.6 million (and earnings per share of €0.13) by about December 2028, up from €-4.7 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 9.9x on those 2028 earnings, up from -10.2x today. This future PE is lower than the current PE for the GB Leisure industry at 32.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.26%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Escalating and unpredictable tariff regimes, particularly on China sourced tackle where 60% to 80% of global products originate, could compress gross margins if Rapala is unable to fully pass through future cost increases to retailers and consumers. This could ultimately weigh on operating profit and earnings.
• Structural weakness in European and Asian demand, with retailers already highly cautious on inventory and consumers subdued, could shift from a temporary softness to a longer term stagnation in those regions. This would limit top line growth and undermine the expected improvement in net margins and earnings.
• Rising competitive intensity from Asian manufacturers increasingly focusing on their domestic markets and emerging as stronger local brands could erode Rapala’s pricing power and brand driven mix gains. This could pressure revenue growth and constrain future operating leverage.
• Ongoing dependence on favorable weather patterns and strong winter fishing seasons, highlighted by significant swings from poor snow conditions in the Nordics to exceptionally strong winters in North America, leaves sales exposed to climate variability. This could drive volatility or decline in revenue and profitability over time.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €1.3 for Rapala VMC based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €240.9 million, earnings will come to €6.6 million, and it would be trading on a PE ratio of 9.9x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of €1.23, the analyst price target of €1.3 is 5.4% 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.