Expansion In Asia-Pacific And LightSpray Technology Will Strengthen Future Competitive Positioning

Key Takeaways

• Global brand awareness and strategic marketing are set to drive revenue growth through increased consumer engagement and market penetration.
  
• Expansion in Asia-Pacific and product innovations like LightSpray technology will boost revenue, market share, and profitability.
  
• Challenges in supply chain and inventory, heavy marketing expenditure, currency fluctuations, and expansion risks could impact revenue growth and profitability.

Catalysts

Engages in the development and distribution of sports products worldwide.

• Increased global brand awareness through strategic marketing initiatives, including sponsorships and partnerships, is expected to drive future revenue growth as more consumers become acquainted with the brand globally.
  
• Expansion in the Asia-Pacific region, especially in fast-growing markets like China and Japan, is anticipated to significantly boost revenue and global market share as the company opens new stores and strengthens its e-commerce presence.
  
• Continued product innovation, such as the LightSpray technology, could lead to both revenue growth and higher gross margins by differentiating On's products in the market and enabling more cost-efficient manufacturing processes.
  
• The strategic expansion of the Direct-to-Consumer (D2C) channel is likely to enhance revenue growth and improve net margins by allowing the company to capture a larger share of consumer spending through its own retail and online platforms.
  
• Operational improvements and supply chain efficiencies are expected to positively impact net margins and overall profitability by reducing costs and improving the agility of product delivery to meet strong consumer demand.

On Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming On Holding's revenue will grow by 26.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.8% today to 10.7% in 3 years time.
• Analysts expect earnings to reach CHF 466.8 million (and earnings per share of CHF 1.67) by about December 2027, up from CHF 126.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 44.6x on those 2027 earnings, down from 130.8x today. This future PE is greater than the current PE for the US Luxury industry at 19.6x.
• Analysts expect the number of shares outstanding to decline by 4.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.17%, as per the Simply Wall St company report.

On Holding Future Earnings Per Share Growth

Risks

• There is a risk that operational constraints, such as supply chain and inventory issues, could impact the company's ability to meet demand, potentially affecting revenue growth.
  
• The company's growth strategy heavily relies on increasing brand awareness and market penetration, which involves significant marketing expenditure and may not necessarily translate into proportional revenue growth or improved profit margins.
  
• Financial results are sensitive to currency fluctuations, as indicated by the emphasis on constant currency growth and FX impacts, which could affect net margins and overall earnings.
  
• The significant expansion in Asia, including opening retail stores in a challenging market like China, carries execution risk and could impact profitability if expectations are not met or if market conditions worsen.
  
• The growing reliance on D2C (Direct-to-Consumer) sales calls for more resources and investments, and any miscalculation in channel strategy could lead to increased costs or inefficiencies, impacting net earnings.

Valuation

• The analysts have a consensus price target of CHF 60.34 for On Holding 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 CHF 66.81, and the most bearish reporting a price target of just CHF 48.25.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CHF 4.4 billion, earnings will come to CHF 466.8 million, and it would be trading on a PE ratio of 44.6x, assuming you use a discount rate of 7.2%.
• Given the current share price of CHF 58.2, the analyst's price target of CHF 60.34 is 3.5% 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.