Stable Margins, Strong Pricing Power - a Mean Reversion Opportunity in Huhtamäki?

Catalysts

• Strong Pricing Power: Consistent improvement in gross margins, rising from mid-15% levels in early years to nearly 19% in recent projections.
• Historic Revenue Growth: A robust 10-year CAGR of around 6.3% demonstrates steady top-line expansion.
• Stable Net Profit Margins: Average net margins remain in the mid-5% range over multiple periods, supporting consistent profitability.
• Mean Reversion Opportunity: The current multiple appears low (15x PE with a forwardlooking at 13x PE) relative to historical performance, suggesting potential for reversion to higher growth and margin averages.

Assumptions

• Revenue CAGR:
  • 10-Year: ~6.3%
  • 5-Year: ~4.5%
  • 3-Year: ~–0.5%
  While the longer-term (10-year) CAGR is robust at around 6.3%, recent trends (over the last 3 years) show a slight contraction in revenue, hence the 5-year CAGR 4.5% is assumed for the model. Assuming a mean reversion.
• Average Net Profit Margin:
  • 10-Year: ~5.65%
  • 5-Year: ~5.48%
  • 3-Year: ~5.27%

The net margin remains in the mid-5% range. Which supports the view that the company has maintained pricing power historically (despite draw downs on revenue), and if a top line mean reversion takes place, one might expect these margins and growth rates to stabilize toward historical averages. A 5.5% net profit margin is assumed in the model (which hopefully can surprise on the upside when revenues pick up).

Risks

• Revenue Mean Reversion Uncertainty: The thesis assumes that revenue will revert from the slight contraction observed over the last 3 years back to historical growth levels. If market conditions or demand dynamics worsen, achieving the assumed 5-year CAGR of 4.5% could be significantly challenged.
• Valuation Re-rating Risks: The model is built on the assumption that improved fundamentals could justify a higher multiple (around 17.5x). However, if market sentiment shifts or the company fails to meet growth and margin targets, the valuation may remain low or even contract.

Valuation

• Based on Huhtamäki’s historical trading multiples, its growth profile, and comparisons with peers, a fair forward PE range for the business would be approximately 15x to 18x.
  • Historical Context: Huhtamäki’s forward PE has recently been around 15.8x, with historical values fluctuating between roughly 12x and 24x. This suggests that, in calmer market conditions, a multiple in the 15x–18x range is reasonable.
  • Growth and Stability: the company shows a balance between moderate growth and steady profitability. Such stability in a mature business generally justifies a moderate premium, nudging the upper end of the range toward 18x.
  • Peer Comparison: While peers like UPM and Metsä Board trade at significantly higher multiples due to their stronger growth profiles, Essity’s multiple at 16.9x and Graphic Packaging’s at 11.9x indicate that businesses in this space can command a broad range. Huhtamäki’s fundamentals (moderate growth) suggest it should be valued closer to the lower to mid part of that spectrum.
  Overall, the assumption is that Huhtamäki can trade at a higher multiple over the next three years—supported by moderate top-line growth and gradual improvement in net margins. While this multiple may exceed what longer-term historical trends would fully justify, a target P/E of 17.5x is applied in the model to reflect a near-term re-rating. Accordingly, this is not a long term fundamental play, the idea of the investment case lies rather in the short term multiple expansion: from the current forward looking ~13x P/E to around 17x. If realized, this would imply an upside potential of approximately 30%, which is expected to materialize over the next 12 to 24 months.
• If the PE mean reversion does not happen within the expected timefram, that should trigger a divestment of the position, and given the stability of the business the downside seems fairly limited.
• Simply's 5.9% discount rate is assumed in the model.

Key Indicators to Monitor in Upcoming Quarters

• Topline Growth (Revenue):
  • Quarterly Revenue Trends: Monitor sequential and year-over-year revenue growth to confirm a reversal of the recent contraction and a move toward the historical 5-year CAGR of ~4.5%.
• PE Valuation Expansion:
  • Forward PE Ratio Trends: Track changes in the stock’s forward PE ratio, ensuring it moves from the current forwardlooking ~13x toward the target re-rating of around 17.5x.
  • Guidance vs. Market Expectations: Watch for upward revisions in earnings and margin guidance, which can catalyze multiple expansion in the stock’s valuation.