Accelerated Cost Savings And Demand For Blueloop Recyclable Packaging Will Boost Future Earnings

Key Takeaways

• Cost savings and reduced capital expenditures are enhancing profitability and financial flexibility, supporting potential earnings growth and focused investment in high-growth areas.
  
• Emphasis on sustainable packaging and increased capacity utilization align with market trends, boosting demand, market share, and revenue growth opportunities.
  
• High inflation, geopolitical tensions, and currency fluctuations pose challenges to growth, affecting demand, revenue, and profitability across various regions and segments.

Catalysts

Provides packaging solutions in the United States, Germany, the United Kingdom, India, Turkey, Australia, Thailand, Poland, South Africa, the Czech Republic, Finland, and internationally.

• The ongoing cost savings program, set to generate €100 million in savings from 2024-2026, is currently ahead of schedule and is expected to further enhance profitability through improved margins due to efficiencies in procurement, manufacturing practices, and footprint optimization. This should support earnings growth in the coming years.
  
• The market trend towards sustainable packaging, particularly in the Flexible Packaging segment, with the blueloop recyclable monomaterial portfolio, aligns with European legislation pushing for sustainable packaging by 2030, potentially increasing future demand and stimulating revenue growth.
  
• Huhtamäki’s reduction in capital expenditures from previous levels allows for improved cash flow and financial flexibility. This decision aligns with their current volume capacities and could lead to more focused investment in high-growth areas, potentially boosting earnings in the long term.
  
• Increased capacity utilization in North America, alongside developing stronger commercial relationships with smaller, cheaper local brands, has enabled growth in market share and volumes, paving the way for revenue and margin improvements as the overall market recovers.
  
• Heightened capacities for fiber-based packaging, such as new lines in South Africa, are expected to drive future volume growth, contributing to revenue improvements. Additionally, expected pass-through pricing adjustments for increased raw material costs will improve margins in this segment.

Huhtamäki Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Huhtamäki Oyj's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.0% today to 6.7% in 3 years time.
• Analysts expect earnings to reach €314.2 million (and earnings per share of €2.99) by about December 2027, up from €247.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.5x on those 2027 earnings, up from 14.2x today. This future PE is lower than the current PE for the GB Packaging industry at 22.4x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.58%, as per the Simply Wall St company report.

Huhtamäki Oyj Future Earnings Per Share Growth

Risks

• High inflation rates and economic uncertainty, particularly in the Foodservice Europe-Asia-Oceania sector, could further suppress consumer demand and negatively impact revenue growth.
  
• The company's future sales may be adversely affected by geopolitical tensions, such as the Middle East crisis, leading to boycotts and decreased international brand sales.
  
• Currency fluctuations are a concern, with negative impacts observed from currencies like the Indian rupee, Brazilian real, Turkish lira, and Egyptian pound, potentially affecting net margins and profitability.
  
• The company's underutilization of capacity and the presence of fierce competition, particularly in markets like India and Turkey, may hinder expected volume growth and earnings improvements.
  
• Continued pricing pressure across various segments due to subdued demand could negate the benefits from cost-saving initiatives, impacting net margins and overall profitability.

Valuation

• The analysts have a consensus price target of €41.83 for Huhtamäki Oyj 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 €47.0, and the most bearish reporting a price target of just €34.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €4.7 billion, earnings will come to €314.2 million, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 5.6%.
• Given the current share price of €33.56, the analyst's price target of €41.83 is 19.8% higher.
• 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.