Transition To House Of Brands Structure Will Optimize Future Growth Opportunities

Key Takeaways

• Focus on efficiency improvements and the House of Brands structure is expected to boost net margins and optimize brand management.
  
• Substantial growth opportunities in geographies with low brand penetration, particularly the U.S., will drive revenue growth through market expansion.
  
• Macroeconomic volatility, cost inflation, weather conditions, and supply chain disruptions pose risks to Campari's revenue, net margins, and earnings growth.

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.

• The Campari Group is focusing on efficiency improvements and cost control to offset market and macroeconomic challenges, which should support improved net margins as these initiatives take effect.
  
• The company sees substantial growth potential in various geographies with low brand penetration, particularly the U.S., presenting significant opportunities for revenue growth through market expansion.
  
• The transition to a House of Brands structure is expected to optimize brand-building investments and create efficiencies, enhancing revenue growth and potentially boosting net margins as it allows for more focused brand management.
  
• Initiatives such as managing tariffs effectively and further leveraging the on-trade to maintain pricing discipline are expected to drive revenue resilience and protect net margins despite external pressures.
  
• Increased investment in A&P within a targeted range, alongside the strategic focus on marketplace execution and efficiency, is anticipated to enhance brand strength and foster sustainable revenue growth.

Davide Campari-Milano Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Davide Campari-Milano's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.6% today to 13.4% in 3 years time.
• Analysts expect earnings to reach €483.1 million (and earnings per share of €0.4) by about March 2028, up from €201.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €620 million in earnings, and the most bearish expecting €374 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.9x on those 2028 earnings, down from 34.9x today. This future PE is greater than the current PE for the GB Beverage industry at 22.5x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.57%, as per the Simply Wall St company report.

Davide Campari-Milano Future Earnings Per Share Growth

Risks

• Significant macroeconomic and geopolitical volatility may continue to affect consumption patterns and create low visibility, impacting Campari's revenue and earnings growth.
  
• Poor weather conditions, especially in peak seasons in Europe, can negatively affect sales and margin performance, impacting net margins.
  
• High SG&A costs driven by inflation and investments aimed at strengthening commercial capabilities may weigh on profitability despite efforts to contain these expenses, affecting overall earnings.
  
• Supply chain disruptions and potential tariff impacts, such as those from Mexico and Canada, could pressurize cost structures and net margins, posing a risk to earnings.
  
• The company's growth strategy heavily relies on market expansion and efficiency improvements. Execution risk in expanding market penetration or failing to achieve expected efficiencies could adversely affect revenue growth and net margins.

Valuation

• The analysts have a consensus price target of €7.171 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 €10.4, and the most bearish reporting a price target of just €4.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €3.6 billion, earnings will come to €483.1 million, and it would be trading on a PE ratio of 22.9x, assuming you use a discount rate of 8.6%.
• Given the current share price of €5.85, the analyst price target of €7.17 is 18.5% 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.