Lately, the US dollar (“USD”) has appreciated considerably against the euro. This makes investing in US companies a little less attractive than investing in European companies. For this reason, I used filters to find high-quality stocks that (preferably) earn in euros but get a significant portion of their income in USD. A company I recently came across is Puma (OTCPK: PMMAF, OTCPK: PUMSY), a German sports brand. In this article, I’ll dive into the company and explain why it might be an interesting stock to add to your portfolio.
Puma was founded in 1948 in Herzogenaurach by Rudi Dassler, brother of adidas (OTCQX:ADDYY, OTCQX:ADDDF) founder Adi Dassler. The brothers owned the Gebrüder Dassler Schuhfabrik (a shoe factory) before they got into a fight and decided to split the business. This split the village of Herzogenaurach into two camps, Puma and adidas. Adi Dassler focused more on product development (which most employees wanted, so Adi got 2/3 of the employees), while Rudolf Dassler focused more on sales. A shining example of Puma’s sales and marketing tactics was the 1970 FIFA World Cup, when they paid Brazil star player Pelé $120,000 to tie his shoelaces, emphasizing his shoes.
Nowadays, Puma and adidas are active in many sports such as football, handball, motorsport, golf, athletics and basketball, and their products are no longer limited to shoes. Of the two companies, adidas has a significantly higher market share, with revenues more than triple that of Puma.
If we look at the overall sportswear market, Puma is approximately the third company in terms of market share, behind the aforementioned adidas and Nike (NKE), which together held a market share of around 40% in 2020.
We’ve already taken a look at Puma’s revenue and market share, but it’s also interesting to see how much Puma has grown in revenue over the past few years. Over the past 5 years, Puma has achieved a revenue CAGR of 13.4%. The company had 1 year in which its revenue did not increase, i.e. in 2020, when revenue was significantly impacted by Covid-19.
When we look at the revenue distribution between the different countries, we can see that Puma gained about 29% from the United States. Given that the USD has appreciated against the Euro and the company is reporting in Euros, this could have a significant impact. on income for the current year.
It is also important to see how much of the turnover affects the company’s net profit. Over the past 5 years, Puma’s net profit has grown more than revenue due to improved margins. The increase in net profit margin was the largest in 2017, which the annual report said was due to improvements in supply, an increase in higher-margin products, an increase in retail sales own and at selective price adjustments.
Besides revenue and net income, I also like to look at the financial health of the business. Personally, I prefer looking at the company’s net debt to EBITDA versus its peers, and the debt ratio. This gives a general idea of the strength of the company and whether investors should be concerned about the company.
Puma currently has a net debt to EBITDA ratio of 0.75x, which is very low. Nevertheless, its main competitors, adidas and Nike, have net debt to EBITDA of less than 0.47x and -0.07x respectively. In my opinion, it’s not a shame to have a slightly higher debt than adidas and Nike because a net debt to EBITDA of less than 1 is still very impressive. The company’s debt ratio is 61.6%, which shouldn’t worry investors too much either. Personally, I prefer companies with a debt ratio below 100%, as this gives the company more flexibility in the future.
To value Puma, I used the following methods: a DCF, Forward EV/EBITDA, and the company’s average LTM PE, and LTM EV/Revenue. I like to use multiple methods and take the average of the results, as this lessens the influence of overly optimistic or pessimistic evaluation methods.
For my DCF and Forward EV/EBITDA, I like to use multiple cases: a bearish case, a base case, and a bullish case. This is done because we are unable to predict the future perfectly. Revenue growth is based on analyst forecasts, and COGS is based on COGS for the past three years and adjusted for my overall expectations for the business in this environment. For Puma, this gives the following results:
To discount future cash flows, we estimate the weighted average cost of capital (WACC) of the business. The WACC is based on the beta of the company, my minimum required rate of return, the Treasury rate +0.5% (because I expect it to go up), the cost of equity and the cost debt. I also slightly adjusted the cost of debt to take into account that future borrowings will most likely have to be taken out at higher rates. This gave me the following result:
The estimated growth rate to infinity is set at 1.5%, which is slightly lower than the 10-year CAGR of US GDP. We further assume no share buybacks and a dividend payout rate of 30%. This gives a price target of around €69.58 based on the DCF. Puma’s EV/EBITDA has been around 20, given the current market uncertainty, I’m revising it down to 15. That still gives me a price target of €101.79, or around 35 € above its current price.
The other valuation methods I use, the company’s P/E ratio and EV/Revenue are based on the company’s 10-year averages. The company’s 10-year average P/E, after removing outliers, was 30 and its 2021 EPS was 2.1, giving a price target of €63. The company’s 10-year EV/income was around 1.35 and its 2021 revenue was 6805.4 million. After multiplication, subtracting net debt and dividing by outstanding shares, I get a price target of €62.86.
If we combine all the target prices: €69.58, €101.79, €63 and €62.86, we obtain an average target price of €74.31. This gives an upside of around 15.6% compared to the price at the time of writing.
Risk of change
The company is listed on the Xetra and its main listing is traded in euros. Investors should consider this before starting a position, as currency movements can have a big impact on actual returns. Given that the USD has recently appreciated against the Euro, this risk is lower than a few months ago.
However, since the euro zone is made up of several countries with different economies, it is much more difficult for the ECB to raise rates. For example, the economies of most northern European countries could use higher rates, but some southern European countries would have problems if the rates were increased. So the ECB is walking a tightrope here, which could mean it’s not as aggressive as the Fed, making the USD more attractive to investors. The reason for this is that you can still borrow relatively cheaply in the Eurozone, exchange it for US dollars and put it in a savings account, which would give investors a relatively risk-free return.
Puma depends on an efficient supply chain, as some of its garments are seasonal. If the company does not order on time or the supply chain is limited, it could negatively impact the performance of the company. I rate the likelihood of this risk as moderate as most companies have faced supply chain constraints in the past 6-12 months. Therefore, I expect Puma now have a contingency plan, such as ordering well in advance and moderate to low impact.
Many investors and analysts have spoken of a recession. A recession would have a negative impact on Puma and could lead to weaker growth in the years to come. Nevertheless, I don’t expect a recession to have a huge impact on Puma. During the great financial crisis of 2007-2009, Puma’s turnover increased two years out of three (2007 & 2008). The company has changed significantly since then, but most of its apparel is still priced slightly lower than Nike and adidas. This should mitigate some of the effects of a recession.
Other things to consider
Puma is a German company, which means you have to pay withholding tax on dividends. The withholding tax on dividends in Germany is 26.375%. Due to the tax treaty between the United States and Germany, the withholding tax on dividends should be 15%, so you may need to request a refund of the difference from the German tax authorities. Before doing this, it would be wise to consult a tax specialist.
Puma is an interesting company that has significantly increased its revenue and net profit over the past few years and has a low level of debt. Due to the appreciation of the dollar, European equities might be more attractive as you get more euros for your dollar. However, as with any stock, the company is not without risk and investors should deal with German withholding tax. At the current price, I expect the benefits to outweigh the risks and therefore would consider the stock a buy. However, I recommend investors do their own due diligence before starting a position in Puma.