US Retail Model Changes And Acquisitions To Strengthen Market Position

Key Takeaways

• Acquisitions and brand penetration aim to boost revenue and profitability through expanded markets and improved margins.
  
• Share buybacks and strategic U.S. retail changes enhance earnings per share and sustain profitability.
  
• Revenue decline in North America, deflationary pressures, and currency fluctuations threaten Bunzl's future revenue growth and profitability.

Catalysts

Operates as a distribution and services company in the North America, Continental Europe, the United Kingdom, Ireland, and internationally.

• Bunzl is actively engaging in acquisitions with a robust pipeline, leading to potential revenue growth through expanded market presence and higher-margin operations. (Impacts revenue and earnings)
  
• Implementation of a share buyback program is expected to enhance earnings per share by reducing the number of shares outstanding, complementing capital returns to shareholders. (Impacts earnings per share)
  
• The focus on increasing own brand penetration is expected to improve operating margins, contributing to better net margins and profitability. (Impacts net margins and earnings)
  
• Positive trends in organic revenue growth during the latter part of the half-year indicate potential future revenue increase. (Impacts revenue)
  
• Successful management of operating margins and strategic changes in their U.S. retail business model could lead to sustained profitability and profit forecast upgrades. (Impacts net margins and earnings)

Bunzl Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bunzl's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.2% today to 4.8% in 3 years time.
• Analysts expect earnings to reach £611.1 million (and earnings per share of £1.91) by about February 2028, up from £487.7 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 23.9x on those 2028 earnings, up from 22.7x today. This future PE is greater than the current PE for the GB Trade Distributors industry at 13.7x.
• Analysts expect the number of shares outstanding to decline by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.96%, as per the Simply Wall St company report.

Bunzl Future Earnings Per Share Growth

Risks

• Bunzl's revenue at constant exchange rates declined by 0.4% in the first half of 2024, impacted by deflation and volume softness, especially in North America, which might impede future revenue growth.
  
• The company is facing deflationary pressures and volume reductions in its North American foodservice redistribution business, leading to an organic revenue decline of 4.1%, potentially impacting overall revenue performance negatively.
  
• Currency fluctuations have had a negative impact on Bunzl's financials, with currency translation lowering average results by 3% to 4%, which could affect earnings if fluctuations continue unfavorably.
  
• Adjusted net finance expenses increased, driven by rising interest rates and lease expenses, which could pressure net margins and profitability.
  
• Effective tax rate increased due to changes in UK corporation tax, potentially reducing net earnings and impacting profitability.

Valuation

• The analysts have a consensus price target of £35.575 for Bunzl 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 £41.0, and the most bearish reporting a price target of just £28.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £12.7 billion, earnings will come to £611.1 million, and it would be trading on a PE ratio of 23.9x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of £33.74, the analyst price target of £35.57 is 5.2% 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.