Expansion Into North And Latin America And Operational Efficiencies Will Drive Future Success

Key Takeaways

• Essity's innovations and market expansion efforts focus on driving sales growth and net margin improvements through high-margin products and logistics efficiency.
  
• Strategic divestments and operational efficiencies aim to optimize profitability and support long-term earnings and shareholder value.
  
• CEO resignation, divestments, and cost challenges could create revenue and margin uncertainties, risking Essity's financial stability amidst market disruptions.

Catalysts

Develops, produces, and sells hygiene and health products and services in Europe, North and Latin America, Asia, and internationally.

• Essity's focus on impactful innovations, such as compressed offerings in professional hygiene and new product launches with higher gross margins, aims to drive sales growth and improve net margins by reducing logistics costs and enhancing product value.
  
• Expansion plans in North and Latin America, including increased presence in incontinence care in North America, are expected to boost revenue through market share gains and penetration of high-growth markets.
  
• The strategic divestment of less profitable divisions, such as Vinda, and the restructuring in Professional Hygiene optimize Essity's portfolio for higher profitability, enhancing net margins in the long term.
  
• Essity's commitment to operational efficiencies through digitalization and cost-saving initiatives aims to mitigate rising costs and bolster profit margins, ultimately supporting earnings growth.
  
• The continuation of the share buyback program post-AGM is expected to enhance earnings per share (EPS), contributing to shareholder value and potentially leading to stock revaluation.

Essity Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Essity's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.2% today to 9.6% in 3 years time.
• Analysts expect earnings to reach SEK 15.4 billion (and earnings per share of SEK 22.65) by about January 2028, up from SEK 12.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.3x on those 2028 earnings, down from 16.4x today. This future PE is greater than the current PE for the GB Household Products industry at 15.5x.
• Analysts expect the number of shares outstanding to decline by 0.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.5%, as per the Simply Wall St company report.

Essity Future Earnings Per Share Growth

Risks

• The resignation of the CEO, Magnus Groth, could create uncertainty about the future strategic direction of Essity, potentially impacting investor confidence and subsequently affecting revenue growth and earnings stability.
  
• Divestments, such as that of Vinda and the impact of withdrawing from Russia, have led to a decrease in net sales, which could pose a risk to Essity’s revenue stability if not counterbalanced by growth in other areas.
  
• The company's Consumer Tissue segment experienced lower margins partly due to strong USD appreciation and elevated costs, suggesting potential risks to profit margins if these conditions persist.
  
• Increased costs in energy and distribution, as well as higher raw material costs, place pressure on Essity's cost of goods sold, which may adversely affect net margins if not managed effectively.
  
• Ongoing restructuring in the Professional Hygiene segment presents risks of lower volumes and potential market disruption, which could negatively impact revenue and earnings if anticipated improvements aren't realized.

Valuation

• The analysts have a consensus price target of SEK324.23 for Essity 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 SEK375.0, and the most bearish reporting a price target of just SEK250.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK160.7 billion, earnings will come to SEK15.4 billion, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 4.5%.
  
• Given the current share price of SEK282.0, the analyst's price target of SEK324.23 is 13.0% 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.