2023-08-16 12:04:05 ET
Summary
- SharkNinja, a newly listed household appliances company, has seen a 17% decline in its stock since listing. Its share price could rise again following its Q2 2023 results due later in August.
- Its sales have been strong in recent years, but reflecting broader macro conditions, they have softened in Q1 2023, while margins have expanded likely owing to lower inflation.
- A continuation of the trend in the next quarters indicates that earnings growth can be healthy, which makes its forward P/E attractive. But we have to wait and watch if earnings indeed rise.
Newly listed household appliances company SharkNinja ( SN ) has had just a few days of public trading. But so far, it’s not going well. It’s down by 17% since listing. However, I do believe it's possible that the stock can get a new lease on life once its second quarter earnings are released later this month. It’s not certain, but it’s possible. Here’s why.
The company
Before anything else, let’s look at the company in some detail first. SharkNinja is a spin-off from Hong Kong based JS Global Lifestyle ( JGLCF ). It’s a sizeable company in its own right, with a market capitalization of $4.2 billion and net sales of $3.7 billion in 2022.
Its growth is also notable. Operating under its two brands Shark and Ninja, the company has seen a compounded annual growth rate [CAGR] in sales of 20% over the past 15 years. It started with the Shark brand in 2007, producing steam mops (see chart above). Even now, the band brings in a bigger chunk of 54% of the revenues. The rest comes from Ninja, which was launched in 2009, and started by producing kitchen appliances like hand blenders and food processors.
The company now operates across 26 markets, but its biggest market is North America, with an almost 79% share in revenues (see page 8 of the link). While it has grown its market share in the market across categories over the past three years, it has a notable 40%+ share in segments like upright vacuums, blenders and electric grills now (see chart below).
Its next biggest market is the UK, with a 13% contribution to sales. Notably, it has a 60% share of electrical cooking pots there and a 43% share of the air fryers market.
Softening sales growth
Promising as the growth looks, 2023 has come with a bit of a speed bump. Consider the adjusted numbers. The company’s adjusted net sales, which exclude the impact of sales from subsidiaries and distribution channels no longer reflective of its operating performance, have grown at a slightly lower but still healthy CAGR of 16% from 2020 to 2022.
However, come 2023 and the effect of the current macro environment has shown up in sales growth. Sales growth has reduced to just 5.8% year-on-year (YoY). This was expected, partly on account of the comparison with what it terms as the “lift-off” from COVID-19. Presumably, its sales grew as we spent more time at home during the lockdowns. The post-pandemic effect was already visible with a small correction in sales in 2022.
But a genuine softening in demand conditions in particularly the US economy, and also in the UK, could also have impacted its sales growth in 2023. In July, retail sales in the US grew by 3.2% YoY , which isn’t the worst seen this year but is a sharp come-off from last year. In the UK, retail sales have been shrinking over the past year.
Improved margins
This would be worrisome, if SharkNinja like many other young companies, was only growth focused. It’s not. In fact, its profits are notable and a cooling off in inflation is likely to have a positive impact on earnings. Going by the difference in producer and consumer price inflation, I am actually of the view that companies across the board can experience margin expansion at this time.
Let’s start with the gross margin, which steadily declined from 2020 to 2022. It has, however, risen above even the 2020 level to 46.8% in Q1 2023, as the cost of sales as a proportion of net sales has declined.
The operating margin too, doesn’t look bad at 14.4%. It has declined from the 15.2% in Q1 2022 but it’s still higher than the numbers for both full year 2021 and 2022. On a net basis, too, it has a nice 14.2% net adjusted income margin for Q1 2023 (Q1 2022: 13.8%).
Estimating the market multiples
But what do the earnings numbers mean for the stock price? For lack of quarterly data for 2022, I have considered the weighted average of the full year 2022’s adjusted net income and Q1 2023’s figures to estimate the trailing twelve months [TTM] adjusted net income, which comes to $277 million.
With a market capitalization of $4.2 billion, this yields a TTM non-GAAP price-to-earnings (P/E) ratio of 15.2x. This is higher than the 13.5x for the consumer discretionary sector, which indicates around 10% potential downside to the stock in my view.
Outlook and forward multiples
Now let’s take a look at its adjusted forward P/E. Here I assume that exactly the same sales growth and margin seen in Q1 2023 are seen for the remainder of the year too. This is somewhat speculative, but really the only option, considering that neither is the company likely to see pandemic period sales growth or margins impacted by high inflation in the recent past.
If this were the case, SharkNinja would wind up with adjusted net earnings of $545.2 million for the full year. This isn’t bad at all, in fact, it’s a massive 65% increase over the past year. This in turn implies a forward P/E of just 7.7x, which is half that for the sector. In other words, this indicates that the price can double. I would take it with a pinch of salt, however, considering that the projections are based on a single quarter’s trends.
Risks and disadvantages
However, a big disadvantage to the company is that the sector as a whole is growing slowly in the US, with a projected CAGR of sub-3% for the 2023-28 period. The company seems to have an edge with innovative, 21st-century products from robot vacuums to sleek styling products. This can continue to drive sales forward.
But we don’t know. Of course, it’s possible that the company expands fast into high growth emerging markets, but that’s tomorrow’s story. Today, its biggest market is the US, which is seeing a slowdown. And it’s reflected even in the company’s own numbers.
What next?
Going forward, I would expect that the company’s top line will stay impacted by macro conditions. I am still hopeful for its earnings figures, though, which can continue to be positively impacted by supportive inflation trends.
This in turn indicates that there’s some upside to price from current levels. I wouldn’t put a number to it right now, for the simple reason that my calculation of forward P/E is speculative. For now, I think it’s a good idea to wait and watch what the next quarter throws up as we as investors get to know the company better. I’m going with a Hold on SharkNinja, with the possibility of a rating upgrade if the earnings continue to be strong.
For further details see:
SharkNinja: Holds Potential, But Wait For Q2 2023 Results