PMMAF - Puma: Shares Have Gotten Cheaper For Good Reasons

2024-01-11 18:19:42 ET

Summary

• The market expects Puma SE to suffer from revenue growth deceleration and miss its mid-term operating margin target.
• Puma shares have gotten cheaper with a -25% drop in its stock price for the recent year.
• Puma's PEG ratio of close to 1 time suggests that the stock remains fairly valued.
• Puma is assigned a Hold rating, as I think that the stock is cheap for good reasons.

Elevator Pitch

I award a Hold investment rating to Puma SE ( PMMAF , PUMSY) [PUM:GR].

Puma's shares have become cheaper and lost a quarter of their value in the last one year, but the stock is fairly priced by the market based on the Price-to-Earnings Growth, or PEG, valuation metric. Puma's current valuations have factored in the company's unimpressive top line growth and profitability prospects. As such, a Hold rating for Puma is warranted.

Puma's shares are traded on both the Frankfurt Stock Exchange and the OTC (Over-The-Counter) market. The three-month average daily trading value for Puma's OTC shares and Germany-listed shares were around $0.8 million and $20 million (source: S&P Capital IQ ), respectively. U.S. brokerages like Interactive Brokers allow investors to buy and sell Puma's shares listed on the Frankfurt Stock Exchange.

Company Description

On its corporate website , Puma highlights that its mission is to be "the fastest sports brand in the world." PMMAF is a leading sportswear company alongside Nike ( NKE ) and adidas AG ( ADDYY , ADDDF ).

The footwear, apparel, and accessories product categories contributed 54%, 32%, and 14% of Puma's top line, respectively, for the first nine months of 2023, as disclosed in its corporate factsheet . The company earned 42%, 38%, and 20% of its 9M 2023 revenue from the EMEA (Europe, the Middle East and Africa), Americas, and APAC (Asia Pacific) geographic regions, respectively. In terms of distribution, PMMAF's wholesale and DTC (Direct-to-Consumer) channels accounted for 77% and 23% of its sales, respectively for the 9M 2023 time frame.

Stock Price Weakness And Valuation Multiple Compression

In the past one year, Puma's OTC shares and Germany-listed shares fell by -25.3% and -25.2%, respectively. The last done stock price of Puma's shares listed on the Frankfurt Stock Exchange was EUR46.82 as of January 9, 2024, which is just +6.9% above its 52-week trough of EUR43.81.

As per S&P Capital IQ data, Puma's consensus forward next twelve months' normalized P/E multiple de-rated from an one-year peak of 28.1 times (as of February 3, 2023) to 18.8 times at the end of the January 9, 2024, trading day. Puma's current P/E ratio is almost half of its 10-year mean P/E metric at 36.4 times.

I am of the opinion that there is justification for Puma's share price correction and valuation de-rating as detailed in the subsequent sections of this article.

Expectations Of Slower Revenue Growth

The sell-side analysts see Puma's top line expansion (in EUR terms) moderating from a CAGR of +15.4% for the FY 2020-2022 time frame to +7.5% in the FY 2023-2025 time period based on S&P Capital IQ data.

Puma's businesses in the U.S. and China are facing certain headwinds, which are reflected in the company's most recent quarterly set of results. In the third quarter of 2023, the company's EMEA segment delivered a pretty healthy +9.9% YoY constant-currency revenue growth, as indicated in its earnings release . In comparison, Puma's Americas and Asia-Pacific businesses achieved relatively slower top line increases of +2.5% YoY and +4.6% YoY, respectively in Q3 2023 adjusted for foreign exchange effects.

PMMAF acknowledged its "relative dependency on the off-price wholesale business in the US" in its Q3 2023 earnings release . Specifically, the company's North America business (as opposed to the Americas segment, which also includes Latin America) suffered from a -12% YoY decline in sales for the third quarter of last year.

Moving ahead, Puma noted at its latest Q3 2023 earnings call that the company has the intention to "rebalance our distribution quality" for the U.S. off-price wholesale business. It will be realistic to think that it will take some time for Puma's U.S. off-price wholesale business to optimize its distribution and achieve a meaningful sales recovery.

Separately, Puma highlighted at the company's third quarter results briefing that the company has a relatively higher proportion of "aged products" in the Chinese market as compared to other geographic regions. This could potentially affect the revenue growth momentum of Puma's China business in the near term.

In the medium to long term, it remains to be seen if Puma can grab a reasonable share of the Chinese sportswear market. According to an earlier March 6, 2023 Retail In Asia news article , Puma's market share in China is "'significantly too low' especially compared with rivals Adidas and Nike" citing comments from Puma's CEO at a prior investor meeting. At its most recent quarterly results call, PMMAF mentioned that the "performance brand" positioning "is a credibility which we are still lacking currently in China," and this might be a factor that has prevented Puma from gaining share in the Chinese market.

In summary, it is easy to understand why analysts have a dim view of Puma's top line growth prospects in the coming years, taking into account challenges relating to the company's China and U.S. businesses.

The Market Has Doubts About Puma Profitability Target

Puma's goal is to register an operating margin of 10% in FY 2025. But analysts are skeptical about the company's intermediate term profitability target. The sell side's consensus FY 2025 operating profit margin estimate is 110 basis points lower at 8.9% (source: S&P Capital IQ ).

Investments and product mix are the two main issues that are likely to have influenced the market's expectations of Puma's future profitability improvement in a negative way.

In the preceding section, I indicated that Puma needs to tweak its distribution mix in the U.S. and also enhance the brand's positioning in China, and these plans will most probably require a meaningful amount of investments. Puma also shared at its Q3 2023 earnings call that the company's typical 10% marketing costs-to-revenue ratio "is exactly the right one." In other words, marketing expense optimization is unlikely to be a profitability enhancement level for Puma in the short term.

On the other hand, Puma's product mix has become more unfavorable, with lower sales contribution from higher-margin apparel and accessories. For the 9M 2023 period, footwear sales (adjusted for foreign exchange sales) for the company grew by +19.0% YoY. Puma's constant-currency revenue derived from apparel and accessories increased slightly by +1.6% YoY and +1.8% YoY, respectively, for 9M 2023.

In specific terms, the sales contribution of apparel and accessories combined decreased from 49% for FY 2022 to 46% in the first nine months of the prior year. It is likely that consumers have cut back on the purchase of relatively more discretionary products such as accessories in tough economic times like these, which could hurt Puma's profit margins.

Closing Thoughts

Puma SE is rated as a Hold considering its fair valuations. The stock's PEG (Price-to-Earnings Growth) multiple is 1.07 times, based on a consensus forward P/E ratio of 18.8 times and the company's consensus FY 2023-2025 normalized EPS CAGR of +17.6% (source: S&P Capital IQ ). A PEG metric of 1 time is deemed to be fair, so I view Puma's shares as fairly valued. Negatives relating to revenue growth deceleration and weaker-than-expected margin improvement are reflected in Puma's share price and valuations.

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