Puma Stock: Buy Rating Confirmed (OTCMKTS:PMMAF)

The German sporting goods manufacturer started 2022 with significant growth. Well, we were not surprised. In our previous release, we emphasized Puma (OTCPK:PMMAF) as a long-term growth opportunity, and today we are reiterating our positive view. Why are we still confident?

1. Financially speaking, Puma increased inventories in the warehouses and this gives us hope for a strong Q2;
2. Despite restrictions in the supply chain, it was possible to “create enough products to partially meet the increasing demand” said CEO Björn Gulden.
3. Looking at the geographical level, we see that in the entire North American market, the company increase top-line sales by more than 40%. In the USA, the re-entry into the basketball business is paying off;
4. Our internal team is confident in fashion companies’ ability to increase price over costs. Despite higher costs, among other things due to the ongoing problems in the supply chain, the company delivered solid results;
5. As we mentioned in our previous publications “Puma’s sales exposure to Russia and Ukraine stands at 3% of 2021 accounts, not a worrying figure by our calculations, and we feel that this has been more than priced in“. Indeed, the Russian war in Ukraine reduced the latest result by €10 million. More in detail, Puma has closed its stores in Russia and stopped sponsoring activities.

Conclusion & Guidance

Looking at the consensus, we acknowledged that pressure on gross margins was greater than feared in the first quarter. Puma delivered a strong Q1 thanks to higher sales and strict cost discipline. Looking ahead, there is evidence that Western consumers are tightening their belts in the face of increased inflationary pressure. However, Puma confirmed the annual forecast. “Based on such a strong first quarter, we would normally raise our outlook for the year as a whole” explained Gulden. But once again, we should recognize that there are factors of uncertainty based on COVID-19 in China, Ukraine’s war, continued tense freight situation and the ongoing inflationary pressure. Although Puma sees further potential for growth in sales, there is increased cost pressure. “In this situation, we will continue to prioritize increasing market shares and our medium-term growth potential over short-term profit optimization” said Gulden. The company continues to expect currency-adjusted sales growth of at least 10% for 2022. The operating result is expected to increase from €557 million in the previous year to between €600 and €700 million.

We continue to value Puma at €98 per share thanks to a DCF valuation and a pretty important discount that is not justified on a P/E ratio compared to its historical average. We are also more confident for the following considerations:

1. The difficulties in the Chinese market continue. In addition to the continuing political tensions with the western world, which is causing the Chinese to increasingly turn to domestic brands, the renewed outbreak of the corona pandemic impacted the revenue line but compared to its peers, Puma is much less exposed to China;
2. We see positive signs from wholesale accounts;
3. The company has lagged to develop its digital channel, and thanks to the new app, our internal team is more confident in sales and margin growth;
4. Puma stock corrections have been too strong compared to its peers.

Out of curiosity, the US bank JPMorgan left the rating for Puma at “overweight” with a target price of €110. The industry expert believed that the company could achieve better results than the market in the coming year and did not see any refinancing risks. In addition, JP Morgan continues to believe in Puma’s strong management and Puma’s solid brand momentum set for a structural growth within the industry.