Mexico Exposure And Rising Input Costs Will Undercut Stability

Key Takeaways

• Evolving consumer preferences and growing regulatory pressures threaten demand, margins, and profitability for Grupo Herdez's processed and packaged foods.
  
• Heavy reliance on the Mexican market, input cost volatility, and increased competition could constrain growth and weaken future earnings.
  
• Diversifying revenue through international expansion, digital upgrades, and strong brand categories is driving long-term growth, improved efficiency, and resilience against local market volatility.

Catalysts

A food company, provides processed food in Mexico and internationally.

• The ongoing acceleration of health-conscious consumer preferences and mounting opposition to processed foods threaten to undermine demand for Grupo Herdez's core packaged portfolio, which could lead to persistent volume stagnation and eventually declining revenues.
  
• Intensifying regulatory risks-including the potential for new taxes or restrictions on products high in sugar, sodium, and preservatives across Mexico and Latin America-may drive up compliance costs over time and further erode sales volumes, reducing both gross margin and net profitability.
  
• The company's continued reliance on Mexico for the bulk of its revenue, combined with limited progress in international diversification, leaves Grupo Herdez acutely exposed to local economic downturns and shifting domestic consumer trends that could put sustained pressure on top-line growth and operating profits.
  
• Sustained volatility in agricultural inputs due to climate change and environmental disruptions is likely to create ongoing cost pressures, raising raw material expenses in categories like avocado and tomato, which would further compress gross margins and weaken bottom-line earnings.
  
• Heightened competition from private labels and the proliferation of fresh, short-supply-chain food models risk eroding Grupo Herdez's market share in traditional shelf-stable and processed foods, placing future revenue streams at risk and limiting any potential for long-term earnings growth.

Grupo Herdez. de Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Grupo Herdez. de compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Grupo Herdez. de's revenue will grow by 1.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.7% today to 7.0% in 3 years time.
• The bearish analysts expect earnings to reach MX$2.9 billion (and earnings per share of MX$7.13) by about August 2028, up from MX$1.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.9x on those 2028 earnings, down from 12.2x today. This future PE is lower than the current PE for the MX Food industry at 16.2x.
• Analysts expect the number of shares outstanding to decline by 0.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.87%, as per the Simply Wall St company report.

Grupo Herdez. de Future Earnings Per Share Growth

Risks

• Despite short-term volatility and a soft consumer environment, Grupo Herdez grew market share in two-thirds of its portfolio and continues to achieve stable long-term volume and sales growth, which supports the potential for steady growth in revenue and limits downside risk.
  
• The company saw impressive growth in its export segment, with sales up 12% for the quarter and almost 10% year-to-date, driven by volume expansion and successful international distribution efforts, which broadens its revenue base beyond Mexico and reduces dependence on the local economy.
  
• Ongoing investments in digital infrastructure, such as a company-wide ERP rollout, and efforts to optimize operations and commercial strategies indicate a focus on improving efficiency, controlling costs, and strengthening profitability, supporting margin expansion in the long term.
  
• MegaMex, Grupo Herdez's equity investment, delivered a substantial contribution with sales up 21% quarter-over-quarter and strong volume gains in value-added categories like guacamole and mini tacos, demonstrating that high-margin categories and strong brands are helping drive profitability and EBITDA growth even amid raw material price pressures.
  
• The management continues to project double-digit growth in net income and stable-to-improving margins for the full year, with export and Impulse segments expected to rebound in coming quarters, suggesting robust operating leverage that could result in earnings and profit growth over time.

Valuation

• The assumed bearish price target for Grupo Herdez. de is MX$55.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Grupo Herdez. de's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MX$75.0, and the most bearish reporting a price target of just MX$55.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be MX$40.7 billion, earnings will come to MX$2.9 billion, and it would be trading on a PE ratio of 8.9x, assuming you use a discount rate of 13.9%.
  
• Given the current share price of MX$53.9, the bearish analyst price target of MX$55.0 is 2.0% higher. The relatively low difference between the current share price and the analyst bearish 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.