Tactical Growth With Expansions In South America Boosts Long-term Profitability

Key Takeaways

• Strategic acquisitions in South America and EAA are enhancing market access and driving revenue growth and margin expansion.
  
• Efficiency improvements, including closing older bakeries, are optimizing costs and boosting profitability via record EBITDA margins aided by favorable commodity costs.
  
• Restructuring and strategic exits, tough market conditions, and financial risks from debt and currency fluctuations challenge profitability and growth prospects.

Catalysts

Produces, distributes, and sells various bakery products.

• Grupo Bimbo is closing five bakeries, including three in the U.S., which should optimize their production footprint and potentially improve long-term profitability by reducing costs associated with older, less efficient facilities. This may positively impact future net margins.
  
• Grupo Bimbo is focusing on expanding distribution and market penetration in North America, aiming to meet consumers where they shop through competitive pricing strategies and adjustments to price pack architecture. This initiative could drive future revenue growth as the company captures more market share.
  
• The acquisition of Pagnifique in Uruguay and the signed agreement to acquire Wickbold in Brazil indicate strategic portfolio expansion in South America, which could lead to increased revenue through access to new and larger markets.
  
• In the EAA region, Grupo Bimbo experienced a significant adjusted EBITDA margin expansion, driven by strong sales performance and efficiencies realized from previous acquisitions. This robust performance and the strategic acquisition of Don Don could further enhance revenue growth and margin expansion.
  
• Grupo Bimbo is benefiting from decreased commodity costs and productivity improvements, which contributed to a record adjusted EBITDA margin in the third quarter. This trend may continue to positively influence earnings if commodity prices remain favorable.

Grupo Bimbo. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Grupo Bimbo. de's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 4.4% in 3 years time.
• Analysts expect earnings to reach MX$20.5 billion (and earnings per share of MX$4.51) by about November 2027, up from MX$12.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting MX$27.8 billion in earnings, and the most bearish expecting MX$18.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.6x on those 2027 earnings, up from 22.2x today. This future PE is greater than the current PE for the MX Food industry at 18.4x.
• Analysts expect the number of shares outstanding to grow by 1.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.23%, as per the Simply Wall St company report.

Grupo Bimbo. de Future Earnings Per Share Growth

Risks

• The recent closures of bakeries in the U.S., Canada, and Spain suggest potential restructuring challenges, which could lead to onetime costs and might affect short-term profitability and net margins.
  
• The soft consumer environment in North America, especially with weak consumption due to inflationary pressures, poses a risk to revenue growth in that region.
  
• The strategic exit from certain nonbranded businesses could initially reduce top-line revenue, affecting short-term financial performance.
  
• The challenging competitive environment, particularly in regions like Chile and Colombia, alongside weak consumption, could pressure the company’s market share and revenue growth in Latin America.
  
• The increase in net debt due to strategic investments and acquisitions, coupled with the fluctuation in the Mexican peso, adds financial risk and could impact future earnings and balance sheet strength.

Valuation

• The analysts have a consensus price target of MX$76.41 for Grupo Bimbo. de 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 MX$96.0, and the most bearish reporting a price target of just MX$61.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be MX$461.7 billion, earnings will come to MX$20.5 billion, and it would be trading on a PE ratio of 24.6x, assuming you use a discount rate of 13.2%.
  
• Given the current share price of MX$64.97, the analyst's price target of MX$76.41 is 15.0% 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.