Los Danzantes Acquisition And New Launches Will Boost Market Appeal

Key Takeaways

• Emperador's premiumization strategy and cost reductions aim to enhance revenue and improve net margins by offering high-margin products and reducing supply chain costs.
  
• Targeting new market segments, such as Gen Z and broader audiences, aims to boost sales, with cost-sharing to mitigate U.S. tariff impacts stabilizing earnings.
  
• Inflation, competition, and rising costs challenge Emperador's revenue and profitability, while international trade policies and brandy market shifts heighten strategic risks.

Catalysts

Engages in manufacturing, bottling, and distributing distilled spirits and other alcoholic beverages worldwide.

• Emperador's acquisition of a majority stake in Los Danzantes, a premium Mezcal company, aligns with its premiumization strategy, which can enhance revenue through the introduction of high-margin products.
  
• The launch of the Fundador Super Special at a more accessible price point is designed to capture a broader market segment, aiming to boost volume sales and enhance revenue in the brandy segment.
  
• The introduction of the Gen Z-targeted CLVB Emperador at a low price aims to capture the younger market, increasing brand penetration and driving higher domestic sales revenue.
  
• Emperador is implementing cost reduction strategies in its supply chain, aiming to improve net margins by decreasing input costs, particularly for its imported goods and distillates.
  
• In response to potential U.S. tariff impacts, Emperador is negotiating cost-sharing arrangements with distributors, which could mitigate margin pressures and stabilize earnings from U.S. whiskey sales.

Emperador Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Emperador's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.9% today to 16.4% in 3 years time.
• Analysts expect earnings to reach ₱11.9 billion (and earnings per share of ₱0.66) by about May 2028, up from ₱6.7 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 24.8x on those 2028 earnings, down from 30.6x today. This future PE is greater than the current PE for the PH Beverage industry at 15.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.85%, as per the Simply Wall St company report.

Emperador Future Earnings Per Share Growth

Risks

• Decline in consolidated revenues by 6% year-on-year due to weakness in consumer demand, impacted by inflation and increased competition, may negatively affect future revenue growth.
  
• Pressure on gross profit margins due to rising costs of raw materials and the weak Philippine peso could strain net margins.
  
• Continued investment in advertising and promotion, alongside increased interest expenses, contributed to a decline in EBITDA and overall earnings, potentially affecting future profitability.
  
• Brandy segment faces significant challenges with a 9% revenue decline and preference for cheaper brands, potentially impacting both revenue and net margins unless the pivot to target lower-priced segments succeeds.
  
• New U.S. trade policies and associated tariffs on whiskey could pose risks to Emperador's international revenue streams, particularly affecting gross profits if cost-sharing measures with partners are insufficient.

Valuation

• The analysts have a consensus price target of ₱13.814 for Emperador 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 ₱19.0, and the most bearish reporting a price target of just ₱10.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₱72.9 billion, earnings will come to ₱11.9 billion, and it would be trading on a PE ratio of 24.8x, assuming you use a discount rate of 10.8%.
• Given the current share price of ₱13.06, the analyst price target of ₱13.81 is 5.5% 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.