Reorganization Into Four Brand Houses Will Streamline Operations And Focus Key Brands

Key Takeaways

• Reorganizing into four brand houses is expected to enhance growth and premiumization, positively impacting revenue.
  
• Streamlining the portfolio and cost containment initiatives aim to improve margins and profitability.
  
• External challenges, like poor weather and supply chain disruptions, along with market pressures and reduced consumer confidence, are impacting Davide Campari-Milano's sales and profitability.

Catalysts

Davide Campari-Milano N.V., together with its subsidiaries, markets and distributes alcoholic and non-alcoholic beverages in the Americas, the Middle East, Africa, Europe, and the Asia-Pacific.

• Campari is planning to reorganize its operating model into four newly created houses of brands, which are expected to accelerate growth by enhancing brand focus and premiumization. This strategic shift is anticipated to positively impact revenue growth.
  
• The streamlining of the brand portfolio through disposals of non-core brands will enable Campari to concentrate resources on priority brands, potentially improving overall net margins by reducing complexity and cost.
  
• A significant cost containment program, including the de-layering of global and local structures and reduction of duplications, aims to achieve a 200 basis point reduction in SG&A as a percentage of net sales by 2027. This is expected to enhance operating margin and profitability.
  
• Campari expects sector outperformance, particularly for Aperol, with a projected return to mid
• to high single-digit organic growth in a normalized macro environment. This growth trajectory would likely bolster earnings.
  
• As the impact of positive pricing effects and COGS efficiencies, including lower agave costs, emerges, gross margins are expected to resume accretion over time, supporting overall profitability and earnings growth.

Davide Campari-Milano Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Davide Campari-Milano's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.3% today to 14.7% in 3 years time.
• Analysts expect earnings to reach €527.9 million (and earnings per share of €0.41) by about December 2027, up from €308.3 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 24.4x on those 2027 earnings, up from 24.1x today. This future PE is lower than the current PE for the GB Beverage industry at 24.8x.
• Analysts expect the number of shares outstanding to grow by 2.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.16%, as per the Simply Wall St company report.

Davide Campari-Milano Future Earnings Per Share Growth

Risks

• Poor weather conditions in key markets like Italy during peak seasons have negatively impacted sales of high-margin aperitifs, likely affecting revenue and profit margins.
  
• The ongoing supply chain disruptions, including the impact of a hurricane in Jamaica, have led to shortages in product availability, affecting sales and potentially revenue in international markets.
  
• The competitive pressure in core categories, such as vodka and bourbon, and increased promotional activity in the industry may lead to reduced pricing power and impact net margins.
  
• The increase in fixed costs and planned SG&A investments in a softer market context has caused lower absorption of costs, impacting profitability and earnings.
  
• Reduced consumer confidence and disposable income in key markets, coupled with destocking by wholesalers, can lead to lower-than-expected sales growth, impacting overall revenue and financial performance.

Valuation

• The analysts have a consensus price target of €7.92 for Davide Campari-Milano 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 €10.8, and the most bearish reporting a price target of just €5.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €3.6 billion, earnings will come to €527.9 million, and it would be trading on a PE ratio of 24.4x, assuming you use a discount rate of 8.2%.
• Given the current share price of €6.17, the analyst's price target of €7.92 is 22.1% 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.