La Marzocco Consolidation And Production Shift Will Strengthen Margins And Diversify Operations

Key Takeaways

• Strategic investments and product mix improvements are expected to drive growth, boost profitability, and strengthen De'Longhi's brand and revenue.
  
• Relocation of production and strong free cash flow support could enhance margins, support M&A activities, and improve financial stability.
  
• Geopolitical tensions and tariffs pose challenges to profitability, while increased A&P investments and competitive pressures risk impacting net margins amidst a potential U.S. market softening.

Catalysts

Produces and distributes coffee machines, food preparation and cooking machines, air conditioning and heating, domestic cleaning and ironing, and home care products.

• De'Longhi is expecting volume growth and improved product mix to enhance EBITDA despite current tariffs, indicating a focus on offsetting costs and enhancing profitability.
  
• Continuous investment in innovation and communication, with allocations exceeding €430 million, is expected to drive category expansion and capitalize on market opportunities, positively impacting revenue and brand strength.
  
• The consolidation of La Marzocco and strategic moves in professional coffee are poised to enhance growth rates, strengthen margins, and diversify business operations, thus boosting earnings potential.
  
• De'Longhi's substantial free cash flow allows for flexible capital allocation, enabling potential M&A activities and increased shareholder remuneration, which could positively impact EPS and overall financial stability.
  
• The strategic relocation of production to Southeast Asia aims to mitigate tariff impacts effectively and could lead to improved cost efficiencies, fostering better margins in the long term.

De'Longhi Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming De'Longhi's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.9% today to 9.5% in 3 years time.
• Analysts expect earnings to reach €389.9 million (and earnings per share of €2.54) by about April 2028, up from €310.7 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €350 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.9x on those 2028 earnings, up from 14.7x today. This future PE is greater than the current PE for the GB Consumer Durables industry at 13.5x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.43%, as per the Simply Wall St company report.

De'Longhi Future Earnings Per Share Growth

Risks

• The impact of tariffs on products produced for the U.S. market could eat into profit margins, as the company anticipates a net negative impact of €15 million to €20 million, which could directly affect EBITDA.
  
• The potential for further tariffs in a geopolitical environment characterized by commercial tensions, especially those imposed by the U.S. on European imports, could increase costs and pose risks to the company's ability to maintain its current growth trajectory.
  
• Despite a robust current performance, the company anticipates potential softening in the U.S. consumer market, which could impact sales growth and revenue if consumer demand does not meet expectations.
  
• The company's aggressive investment in advertising and promotion (A&P), including high-profile campaigns, although aimed at driving sales, increases expenditure, which could affect net margins if sales growth does not compensate for these costs.
  
• The competitive environment, particularly in the fragmented U.S. blender market, poses risks to the Nutribullet brand's expansion, as further tariffs could discourage expansion efforts and impact revenue growth in Europe, where the company seeks to strengthen its presence.

Valuation

• The analysts have a consensus price target of €39.725 for De'Longhi 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 €46.6, and the most bearish reporting a price target of just €35.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €4.1 billion, earnings will come to €389.9 million, and it would be trading on a PE ratio of 21.9x, assuming you use a discount rate of 12.4%.
• Given the current share price of €30.38, the analyst price target of €39.72 is 23.5% 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.