While everyone knows the big sporting goods brands like Nike (NKE) and Adidas (OTCQX:ADDYY) (OTCQX:ADDDF), Puma (OTCPK:PMMAF) (OTCPK:PUMSY) is often overlooked because this small player has only one total income just under 6 billion euros. The company is doing well in the Americas, with revenue growing nearly 50% in 2021, which is a far greater revenue increase than any other region Puma operates in. This pushed the contribution of the Americas to the composition of consolidated revenues. nearly 39% (compared to just under 34% in 2020). 2021 was also the first year in the company’s history that its revenue in the Americas exceeded its core EMEA markets.
As Puma’s US listing is rather illiquid, I strongly recommend trading Puma shares using its primary listing on the Deutsche Boerse stock exchange. The stock symbol in Germany is PUM and the average daily volume of 500,000 shares represents a monetary value of 37 MEUR. And since last year, Puma has been part of the Dax 40 index.
Unfortunately, Puma’s website mostly contains download links only, but you can find all relevant information here.
Puma is aggressively investing in expansion, weighing on free cash flow result
2021 has not been an easy year for Puma as in the first half the company has had to deal with COVID-related measures like store closures, while in the second half Puma has had to deal with supply chain issues. The logistical challenges persist but I hope to see the majority of issues resolved by the end of this year as the acute shortage of shipping containers is expected to be over while port congestion levels are expected to improve.
Puma’s financial results have recovered nicely after the disappointing performance in 2020. Revenues increased by around 30% to 6.8 billion euros while gross profit increased at a slightly faster pace. As you can see in the image below, “Other Operating Expenses” increased by about 20%, which is a pretty big increase, but obviously that was totally eaten up by the rise in revenue and gross profit and EBIT almost tripled on an annual basis.
With net profit of €377 million, of which just under €310 million was attributable to Puma shareholders, EPS was around €2.07 per share. This is almost four times more than in 2020.
As Puma manages a healthy balance sheet with little debt, the total financial charges may seem high, but as shown in the image below, the net interest charges on financial debt were close to zero. Interest related to lease debts exceeded 31 million euros (compared to 29.3 million euros in 2020) and another substantial part of the net financial charges was related to “other” charges: these are derivatives on currencies.
As Puma currently trades at 35 times earnings, I was hoping that the free cash flow result would exceed the reported net income. Unfortunately, Puma has kicked its growth investments into high gear and reported free cash flow is actually lower than reported net income due to these growth investments.
The company reported operating cash flow of EUR 460.1m, but as you can see below, this includes a working capital investment of EUR 214.3m. We also find that Puma paid €146.9 million in taxes, although the income statement shows that approximately €129 million was due based on the pre-tax result for the financial year 2021. On a On an adjusted basis, cash flow from operations was approximately €692 million.
However, there are still other adjustments we need to make. We must deduct the EUR 48m paid to non-controlling interests, while we must also deduct the EUR 161m of lease payments as well as the EUR 44.4m of interest payments (including interest payments both on the financial debt and on the rent Liabilities). And to be consistent, we must also add the 11.9 million euros in interest payments received.
This would result in an adjusted operating cash flow of 451 million euros. Total capex was around €202 million, meaning Puma generated a free cash flow result of €249 million, or just under €1.70 per share. Disappointing? Yes. But we clearly see that the combination of capital expenditure (202 million euros) and lease payments (161 million euros) for a total of 363 million euros is a little higher than the 306 million euros of depreciation charges for the year.
For 2022, Puma expects to achieve double-digit revenue growth, which is also expected to impact the level of net income. While EBIT in 2021 was around €557 million, Puma is now targeting a full-year EBIT of €600-700 million, which would represent an increase of 8% to 26%. Given the current situation in Europe and the way inflation is spreading through all supply chains and given that it will likely shake consumer confidence levels, perhaps we should aim for the lower end of the official direction of the EBIT.
Puma will continue to invest in itself in 2022 and total capex will again be significantly higher than in 2021. Puma plans to invest 220 million euros in “capital assets” this year as the company continues to develop its infrastructure to support long-term growth plans.
Puma digested the weak performance in 2020 and despite the impact of supply chain issues and temporary store closures, Puma saw its net profit and free cash flow increase by a triple-digit percentage. That’s great, but it still doesn’t make the stock cheap.
Puma is currently trading at around 35 times its 2021 earnings, but we can probably expect EPS to increase by around 10% in 2022 if the company is indeed able to grow revenue and EBIT as expected. Considering that Puma has a positive net cash position of around €375 million (excluding lease liabilities) and generated an EBITDA of around €700 million (again, excluding lease liabilities and amortization), the stock trades at an EV/EBITDA ratio of 15.
As Puma is a growth story, perhaps we give more weight to the future. The analysts’ consensus estimate calls for EBITDA of €1.37 billion in 2024. If I assume that around €190 million will be related to leases, the underlying EBITDA excluding leases would be around 1, 18 billion euros and that would reduce EV/EBITDA to less than 9, which makes Puma much more attractive as an investment and business in line with its European competitor Adidas.
I currently do not hold any position at Puma, but I will keep an eye on the performance of the company in the near future.