Asset-light Model And Jafra Pipeline Will Build Long-Term Resilience

Key Takeaways

• Betterware's asset-light model and low fixed expenses protect profitability and cash flow, enhancing future earnings stability during macroeconomic volatility.
  
• Diversification efforts, strategic pricing, and product innovation may boost revenue and margins, supported by enhanced operating efficiencies and a resilient commercial model.
  
• Heavy reliance on Chinese manufacturing and peso depreciation risks squeezing margins, while consumer confidence collapse threatens revenue and profitability stability.

Catalysts

Operates as a direct-to-consumer selling company in the United Staes and Mexico.

• Betterware de México operates with a low fixed expenses and an asset-light model, allowing for protection of profitability and cash flow during macroeconomic volatility, which could enhance future earnings stability.
  
• The company's strategy includes proactive pricing, promotions, and improved sales force engagement, which are expected to reaccelerate growth and profitability, potentially impacting future net margins and revenue positively.
  
• There is an ongoing diversification and innovation effort within Betterware's product mix, including strategic pricing adjustments and an exciting new product pipeline in Jafra, which may boost revenue growth and margins in the coming quarters.
  
• The company is leveraging its existing commercial model powered by technological tools, which could enhance operating efficiencies and support earnings resilience despite challenging external conditions.
  
• Supply chain opportunities are being explored to mitigate sourcing challenges due to China-U.S. tensions, including potential cost advantages from reduced container prices, which may improve gross margins and reduce operating risks.

Betterware de MéxicoP.I. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Betterware de MéxicoP.I. de's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 14.4% in 3 years time.
• Analysts expect earnings to reach MX$2.4 billion (and earnings per share of MX$75.24) by about May 2028, up from MX$568.0 million 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 8.3x on those 2028 earnings, down from 12.7x today. This future PE is lower than the current PE for the US Specialty Retail industry at 15.2x.
• Analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.8%, as per the Simply Wall St company report.

Betterware de MéxicoP.I. de Future Earnings Per Share Growth

Risks

• Betterware's reliance on Chinese manufacturing (80% of products) coupled with escalating tariffs presents a significant risk to profitability, potentially exacerbating cost pressures and impacting net margins.
  
• The depreciation of the Mexican peso by approximately 20% year-over-year has led to increased costs for imports, affecting gross margins and resulting in price increases that could further dampen consumer demand and revenue.
  
• The decline in consumer confidence and economic uncertainty in Mexico and the U.S., exacerbated by global volatility, poses challenges to revenue stability, affecting short-term consumption and associated earnings.
  
• A significant decrease in EBITDA (29.1%) due to compressed gross margins and weaker sales volumes highlights the financial strain from macroeconomic conditions, with further declines posing risks to overall profitability.
  
• Free cash flow was negative for the quarter due to increased working capital needs and higher tax payments, pressuring cash reserves and potentially impacting future growth investments and financial flexibility.

Valuation

• The analysts have a consensus price target of $18.819 for Betterware de MéxicoP.I. de 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 $22.58, and the most bearish reporting a price target of just $15.06.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MX$16.4 billion, earnings will come to MX$2.4 billion, and it would be trading on a PE ratio of 8.3x, assuming you use a discount rate of 12.8%.
  
• Given the current share price of $9.9, the analyst price target of $18.82 is 47.4% 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.