Expanding Health And Hygiene Will Secure A Resilient Future

Key Takeaways

• Focus on high-margin categories and local production aims to boost profitability and stabilize costs.
  
• New product launches and share buybacks are expected to drive revenue growth and increase earnings per share.
  
• Rising costs, uncertain demand, and strategic financial pressures could impact Essity's net margins, cash reserves, and revenue growth potential.

Catalysts

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

• Essity is focusing on growing its high-margin categories such as Health & Medical and Professional Hygiene, which can positively impact net margins and overall earnings.
  
• The company is implementing a recurring share buyback program using its strong operating cash flow, expected to enhance earnings per share (EPS).
  
• Essity is launching new and innovative products in significant growth areas like incontinence care and consumer tissue, likely to drive future revenue growth.
  
• By producing and sourcing locally, Essity minimizes the impact of tariffs, helping to maintain stable cost of goods sold (COGS) and protecting net margin.
  
• Plans to accelerate volume growth should enhance cost absorption and improve operating leverage, contributing to enhanced net margins and profitability.

Essity Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Essity's revenue will grow by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.6% today to 9.6% in 3 years time.
• Analysts expect earnings to reach SEK 14.7 billion (and earnings per share of SEK 21.69) by about May 2028, up from SEK 12.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK13.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.2x on those 2028 earnings, up from 15.4x today. This future PE is lower than the current PE for the GB Household Products industry at 17.8x.
• Analysts expect the number of shares outstanding to decline by 1.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.76%, as per the Simply Wall St company report.

Essity Future Earnings Per Share Growth

Risks

• Essity is facing higher costs of goods sold (COGS) due to increased raw material prices, primarily pulp, which are not entirely offset by price increases, potentially impacting net margins negatively.
  
• The volume growth in key segments such as Professional Hygiene in North America is uncertain, affected by softer market demand, which could slow down revenue growth if not addressed.
  
• Consumer Tissue is experiencing a trend where growth is primarily in lower-tier segments, making premiumization challenging. This could impact the mix and overall revenue growth potential.
  
• The company anticipates rising SG&A expenses due to salary increases and higher IT spending, which, coupled with flat revenue growth, might pressure earnings.
  
• Essity's strategy of maintaining higher dividend levels and executing share buybacks could strain their cash reserves, especially if market conditions require further investment to maintain competitive positioning or pursue growth-acquisition opportunities.

Valuation

• The analysts have a consensus price target of SEK311.462 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 SEK345.0, 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 SEK153.4 billion, earnings will come to SEK14.7 billion, and it would be trading on a PE ratio of 16.2x, assuming you use a discount rate of 4.8%.
  
• Given the current share price of SEK278.4, the analyst price target of SEK311.46 is 10.6% 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.