Travel Shocks Will Compress Margins While Digital Trends Ensure Hope

Key Takeaways

• Heavy focus on travel retail and traditional publishing assets increases vulnerability to travel disruptions, high fixed costs, and intensifying competition from digital-first platforms.
  
• Transition to digital content provides margin opportunities but poses risks from larger global tech competitors and rapid shifts in consumer behavior.
  
• Heavy reliance on travel retail and slow digital adaptation, combined with high fixed costs and debt, exposes Lagardère to earnings risks amid industry and macroeconomic shifts.

Catalysts

Engages in content publishing, production, broadcasting, and distribution businesses in France, the United Kingdom, the United States, Spain, and internationally.

• While Lagardère's Travel Retail segment continues to benefit from steady growth in global travel and tourism, its heavy reliance on airport and railway concessions exposes it to unforeseen shocks such as geopolitical instability or changes in travel patterns, which could introduce considerable cyclicality and risk to revenue growth.
  
• Although the expansion into digital content, including audiobooks and e-books (now accounting for 14% of publishing revenues), offers meaningful long-term margin uplift and recurring cash flows, the company faces significant challenges from accelerating shifts to digital and increasing competition from global tech platforms that could pressure both margins and market share if Lagardère cannot keep pace with innovation.
  
• Despite robust free cash flow generation and strong deleveraging in 2024, high fixed-cost structures in publishing and travel retail may leave Lagardère vulnerable to cost pressures and reduced operating leverage as industry disruption from digitalization and sustainability regulation intensifies, ultimately threatening net earnings and return on capital.
  
• While international growth in publishing (with over two-thirds of publishing revenues now generated outside of France) is encouraging and taps into rising middle-class consumption in emerging markets, the company's ability to capture and retain emerging market demand is constrained by intensifying competition from digital-first and self-publishing platforms, potentially limiting long-term top-line growth.
  
• Even though recent M&A activity and integration into Vivendi open doors for scale efficiencies and content synergies, this shift also brings the risk that Lagardère struggles to fully capitalize on premiumization and experiential consumer trends if legacy assets and slower innovation stifle its ability to respond to evolving consumer preferences, ultimately impacting future revenue and margin progression.

Lagardere Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Lagardere compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Lagardere's revenue will grow by 4.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 1.9% today to 1.1% in 3 years time.
• The bearish analysts expect earnings to reach €108.3 million (and earnings per share of €2.64) by about July 2028, down from €168.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 39.9x on those 2028 earnings, up from 17.3x today. This future PE is greater than the current PE for the GB Media industry at 12.1x.
• Analysts expect the number of shares outstanding to grow by 0.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.03%, as per the Simply Wall St company report.

Lagardere Future Earnings Per Share Growth

Risks

• The company's success remains heavily reliant on travel retail, which exposes earnings to shocks from geopolitical instability, fluctuations in global travel demand, or future pandemics, creating the risk that revenues and net margins could decline during downturns in international travel.
  
• Despite some growth in digital publishing and audiobooks, there is a persistent gap between Lagardère and best-in-class digital players, especially in France and certain legacy segments; slow adaptation to accelerating digitalization and new consumer habits could erode long-term revenue growth and compress operating margins.
  
• The publishing and media segments continue to face intense competitive pressure from global tech platforms and digital-first content providers, potentially reducing Lagardère's market share and future advertising or distribution revenues as consumer attention shifts away from conventional media.
  
• The high fixed-cost structure and substantial legacy asset base, particularly in publishing and retail, may become a drag as the industry shifts further to digital models and faces cost pressures, threatening earnings and returns on capital if the pace of transformation lags peers.
  
• Elevated levels of net debt and significant interest expenses, though recently reduced, remain a concern; with over 138 million euros in interest costs in 2024, any delays in deleveraging or higher-for-longer interest rates could materially reduce net profits and cash available for growth initiatives or dividends.

Valuation

• The assumed bearish price target for Lagardere is €23.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Lagardere's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €36.0, and the most bearish reporting a price target of just €23.5.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €10.2 billion, earnings will come to €108.3 million, and it would be trading on a PE ratio of 39.9x, assuming you use a discount rate of 9.0%.
• Given the current share price of €20.6, the bearish analyst price target of €23.5 is 12.3% 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.