New Product Lines And Market Expansion Will Drive International Success

Key Takeaways

• Strong U.S. export growth and market expansion indicate ongoing international revenue potential.
  
• Capital investments in production efficiency, IT, and M&A may boost earnings and strategic growth.
  
• Grupo Herdez faces challenges from weather disruptions, rising costs, shifting consumer preferences, and economic uncertainties, potentially affecting revenue and earnings stability.

Catalysts

A food company, engages in the manufacture, purchase, distribution, and marketing of canned and packed food products in Mexico and internationally.

• The Export segment is experiencing strong growth, particularly in the U.S., driven by new product lines and market expansion. This indicates potential for continued revenue growth from international markets.
  
• The implementation of various capacity expansion projects and equipment updates, such as the new multi-format line for salsa production, are expected to increase production efficiency, likely enhancing future revenue and improving net margins.
  
• Despite challenges, MegaMex is restructuring its operations, including diversification of avocado sourcing and increased marketing efforts, which could stabilize and eventually expand margins in the long term.
  
• The company is undertaking significant capital expenditures on IT and product innovation, including an ERP system, which could lead to operational efficiencies and improved earnings.
  
• The focus on M&A opportunities, particularly in the U.S. market, signals potential for strategic growth and expansion, which could positively impact revenue and earnings.

Grupo Herdez. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Grupo Herdez. de's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.7% today to 5.8% in 3 years time.
• Analysts expect earnings to reach MX$2.4 billion (and earnings per share of MX$4.33) by about February 2028, up from MX$1.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, down from 12.9x today. This future PE is lower than the current PE for the MX Food industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 2.16% 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 Herdez. de Future Earnings Per Share Growth

Risks

• Weather-related disruptions, such as hurricanes and flooding affecting the Input segment, resulted in lost sales for Helados Nestlé, which can negatively impact revenue.
  
• MegaMex is facing challenges, including rising avocado prices, increased competition, and shifting consumer preferences towards home cooking, leading to tighter margins and potentially impacting earnings.
  
• Doing business in Mexico has become more expensive due to labor reforms, increased operating costs, and resource scarcity, which could hamper net margins and increase operating expenses.
  
• Cost inflation might be difficult to pass onto consumers in a softer consumption environment, possibly leading to market share losses and affecting revenue growth.
  
• The predicted slowing economy, exchange rate volatility, and geopolitical uncertainties pose potential risks to Grupo Herdez's financial performance, impacting earnings stability.

Valuation

• The analysts have a consensus price target of MX$58.0 for Grupo Herdez. 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$64.0, and the most bearish reporting a price target of just MX$52.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MX$42.0 billion, earnings will come to MX$2.4 billion, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 13.2%.
  
• Given the current share price of MX$55.23, the analyst price target of MX$58.0 is 4.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.