3 Reasons Puma Is Headed for a Rebound in 2010

Includes: PMMAF, PPRUF
by: Véronique Adam

Stock price: €231 (US$345)

Conclusion: Improved visibility on the bottom line, coupled with a potential bid from PPR (OTCPK:PPRUF), Puma’s (OTCPK:PMMAF) main shareholder, should propel further upside. We estimate the fair price of Puma within a valuation range of €260-275 (US$389-411), excluding a bid premium.

9 months: Sales up 0.4% to €1.971m, down 2% excluding forex, adjusted EPS down 10.6%, reported down 49% to €112m.

We expect the consumer environment to remain challenging in Q4 and next year.
Q3 did not show any improvement with sales down almost 10% like for like, notably in footwear and apparel. Rising unemployment and low consumer confidence should prevent sales from rebounding in coming quarters. In addition, growth in reported sales will be held back by a weaker dollar. However, 2010 could be slightly better than 2009, owing to lower inventories in wholesale (around 80% of sales) and some positive impact expected from the football World Cup in South Africa. We expect sales to increase by 1-2% next year.

Bottom line? We're looking for a rebound next year. We feel reasonably confident in this for a number of reasons:

  • First, cash management was impressive this year. Lower capex and improved working capital led to a €128m increase in free cashflow to €145m in the first nine months. We expect free cashflow to amount to €180m for the whole year and net cash position to increase to €280m by the end of 2009. Free cash could achieve €210m next year.
  • Second, COGS could decrease as a result of less promotional activity following inventory reductions in 2009. In addition, Asian sourcing should benefit from the weakness of the dollar in 2010, but even more in 2011 due to the impact of hedging.
  • Third, the restructuring charge taken in Q1 (€110m) is expected to generate savings of €150m by the end of 2011. We think that savings in selling and administrative expenses should more than offset increased marketing spending related to the World Cup.

We expect ebit margin before restructuring to improve from 12.4% forecasted in 2009 (down 240bp of sales) to 13.5% of sales in 2010. Net earnings could rebound to €236m vs €134m projected this year.

PPR bidding for the free float?
We think that the listing of a majority stake in CFAO should give PPR greater room for maneuver and help to take full control of the cash by taking Puma private. Such a move should be earnings accretive and partly offset the dilution anticipated from the listing of CFAO. We also believe that PPR should move before Puma reaps the full benefits of its restructuring program in 2011.

Puma trades at 14.7xP/E and 7.9x EV/EBITDA based on 2010 forecast. FCF yield amounts to 6%. Our valuation range €260-275 suggests 15%+ upside, excluding a bid premium paid by PPR.