Thanks for the article. I'm wondering how you arrive at such strong earnings growth over the next few years when revenue growth appears to be significantly lower. What exactly is expected to lift margins that much? Yeah Market Share gains, operative efficiency and pricing power can lead to better margins, but these earning forecast seem to be very optimistic, dont you think so?
Could you clarify what operational or structural changes you are expecting to drive that margin expansion in more detail?
That's great.. do you have for mercedes Benz, Heidelberg cement, Goldman Sachs as well? And why buy Adidas? You must be a stockholder because the earnings are quite low
Thank you for the question, SHP! Let me explain a bit more.
First of all, we shouldn't forget we are working from a very low base due to all the effects adidas endured in recent years, particularly the loss of Yeezy. The FY24 operating margin was still just 5.6%, far below pre-COVID levels of over 11%, which were already quite weak due to mismanagement.
Considering peers, an operating margin of 10-15% is considered healthy, leaving a lot of room for improvement. Management is now targeting a full-year operating margin of 10% for 2026, which is already almost double that of FY24.
Where are these gains coming from? Adidas' cost profile remains weak, leaving considerable room for upside through more efficient operations. Additionally, its product margin is expected to improve steadily over the coming years, thanks to factory improvements and a more effective pricing strategy, including a reduction in promotions. This alone should already bring it quite far.
In addition, I expect market share gains to drive healthy top-line growth, which should outpace costs, resulting in some additional operating leverage.
Again, the most important takeaway here is the extremely low base we are working from. Beyond 2028, I expect this profit growth to stabilize in the high single digits to low double digits.
It's these factors that I have all taken into consideration in my projections, which, for the record, are actually below the current Wall Street consensus.
Hi Daan! Thanks for your detailed reply. It's not the kind of investment I usually go for, but I can now understand why it might be attractive to some investors who want to have this type of stock in their portfolio. Personally, in the consumer sector, I prefer something like Interparfums SA, where there's less focus on competition and trends. Would you consider taking a look at Interparfums, for example? Or how about NOW, CPRT, KNSL, ...?
I agree it's not one of the most compelling sectors, considering competition and sensitivity to consumer trends.
Interparfum is interesting. I can definitely check this one out. The same applies to Copart and Kinsale, which were already on my radar to investigate. I have added these three to my coverage shortlist now. I will start working on a deep dive into each cause, as these are interesting suggestions.
However, my backlog is quite large, so it may take some time before I can publish these. However, I can assure you I will, likely toward July.
Great post. I'd sort of forgotten about them. Thanks for the reminder.
Thank you, Joel!
Thanks for the article. I'm wondering how you arrive at such strong earnings growth over the next few years when revenue growth appears to be significantly lower. What exactly is expected to lift margins that much? Yeah Market Share gains, operative efficiency and pricing power can lead to better margins, but these earning forecast seem to be very optimistic, dont you think so?
Could you clarify what operational or structural changes you are expecting to drive that margin expansion in more detail?
That's great.. do you have for mercedes Benz, Heidelberg cement, Goldman Sachs as well? And why buy Adidas? You must be a stockholder because the earnings are quite low
No, sorry, I am not following any of those. Why buy adidas? I hope to have laid that out in the article. And yes, I am a shareholder.
Thank you for the question, SHP! Let me explain a bit more.
First of all, we shouldn't forget we are working from a very low base due to all the effects adidas endured in recent years, particularly the loss of Yeezy. The FY24 operating margin was still just 5.6%, far below pre-COVID levels of over 11%, which were already quite weak due to mismanagement.
Considering peers, an operating margin of 10-15% is considered healthy, leaving a lot of room for improvement. Management is now targeting a full-year operating margin of 10% for 2026, which is already almost double that of FY24.
Where are these gains coming from? Adidas' cost profile remains weak, leaving considerable room for upside through more efficient operations. Additionally, its product margin is expected to improve steadily over the coming years, thanks to factory improvements and a more effective pricing strategy, including a reduction in promotions. This alone should already bring it quite far.
In addition, I expect market share gains to drive healthy top-line growth, which should outpace costs, resulting in some additional operating leverage.
Again, the most important takeaway here is the extremely low base we are working from. Beyond 2028, I expect this profit growth to stabilize in the high single digits to low double digits.
It's these factors that I have all taken into consideration in my projections, which, for the record, are actually below the current Wall Street consensus.
Does this answer your question?
Hi Daan! Thanks for your detailed reply. It's not the kind of investment I usually go for, but I can now understand why it might be attractive to some investors who want to have this type of stock in their portfolio. Personally, in the consumer sector, I prefer something like Interparfums SA, where there's less focus on competition and trends. Would you consider taking a look at Interparfums, for example? Or how about NOW, CPRT, KNSL, ...?
I agree it's not one of the most compelling sectors, considering competition and sensitivity to consumer trends.
Interparfum is interesting. I can definitely check this one out. The same applies to Copart and Kinsale, which were already on my radar to investigate. I have added these three to my coverage shortlist now. I will start working on a deep dive into each cause, as these are interesting suggestions.
However, my backlog is quite large, so it may take some time before I can publish these. However, I can assure you I will, likely toward July.
Thanks for the great suggestions!
You are welcome! NOW was already covered by you. KKR and APO look compelling now as well.