US Tariffs And Cost Pressures Will Squeeze Margins

Key Takeaways

• Heightened regulatory and input cost pressures, along with slow digital adoption, threaten group margins and risk undermining future revenue growth and profitability.
  
• Shifting consumer preferences and underperformance in key segments could erode market share, dilute returns on capital, and stagnate or reduce group earnings.
  
• Strategic investments in digital, supply chain, innovation, and emerging markets position the company for resilient growth, broader margins, and long-term alignment with key consumer trends.

Catalysts

Operates as a diversified food, ingredients, and retail company worldwide.

• The increasing regulatory scrutiny and punitive tariffs on imports, particularly for Primark's US operations, as well as stricter environmental requirements on processed foods and carbon emissions, are likely to drive up compliance and input costs for both fashion and food businesses. This sustained cost pressure is expected to materially compress group margins and reduce operating profit over the medium term.
  
• A marked and accelerating shift in consumer preferences away from legacy food portfolios towards plant-based, clean-label, and more sustainable products threatens to erode market share for ABF's core offerings in both grocery and sugar. Given indications of slow adaptation and continued vulnerability in sugar, this trend risks long-term stagnation or decline in group revenues.
  
• Rising energy and commodity price volatility, especially for wheat, sugar, and other inputs, is placing substantial pressure on ABF's cost base at a time when competitive pressures may limit pricing power, directly impacting net margins and generating sustained earnings headwinds across multiple divisions.
  
• The company's slower transition to digital retail, as evidenced by Primark's lack of a robust e-commerce platform, leaves ABF at risk of structurally weaker revenue growth and market share losses versus faster-moving, digital-first competitors, which could undermine future topline expansion and profitability in retail.
  
• The diversified conglomerate structure introduces ongoing risk that underperformance in core segments like Sugar, Allied Bakeries, and Vivergo will continue to dilute overall group returns on capital. This complexity increases the likelihood of capital misallocation, obscures true earnings quality, and may ultimately lead to persistently lower group earnings and return on equity.

Associated British Foods Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Associated British Foods compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Associated British Foods's revenue will grow by 2.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.6% today to 6.9% in 3 years time.
• The bearish analysts expect earnings to reach £1.4 billion (and earnings per share of £2.16) by about August 2028, up from £1.3 billion 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 10.2x on those 2028 earnings, down from 12.0x today. This future PE is lower than the current PE for the GB Food industry at 19.4x.
• Analysts expect the number of shares outstanding to decline by 1.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Associated British Foods Future Earnings Per Share Growth

Risks

• Sustained investment in digital initiatives, store rollouts, and supply chain optimization at Primark is supporting margin expansion and driving international growth, which may lead to higher future revenues and improved operating margins.
  
• Diversification across geographies and business segments, combined with a strong balance sheet and disciplined capital allocation, positions ABF to weather cyclical weakness in certain divisions while supporting long-term earnings resilience.
  
• Long-term capacity investments and innovation in specialty ingredients, premium grocery brands, and health & nutrition align ABF with secular trends in clean label, wellness, and plant-based products, providing opportunities for higher-margin growth and revenue mix improvement.
  
• Progress in automation, labor optimization, and energy efficiency initiatives across retail and food businesses is unlocking structural cost savings, supporting net margin expansion even in challenging environments.
  
• Expansion into emerging markets, particularly in Africa and the Gulf region, is leveraging population growth and rising demand, laying a foundation for future revenue and profit growth through new capacity, premiumization, and brand extensions.

Valuation

• The assumed bearish price target for Associated British Foods is £17.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Associated British Foods'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 £31.0, and the most bearish reporting a price target of just £17.5.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £21.1 billion, earnings will come to £1.4 billion, and it would be trading on a PE ratio of 10.2x, assuming you use a discount rate of 6.8%.
• Given the current share price of £22.12, the bearish analyst price target of £17.5 is 26.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.