Morningstar | Breville Shares Remain Overvalued Despite Ongoing European Expansion
After a stellar share price rally since the start of calendar 2019, shares in narrow-moat-rated Breville Group are meaningfully overvalued relative to our unchanged 11.00 per share fair value estimate. While both the business and products are high quality, we believe the market is overly optimistic about the earnings prospects in Europe and is assuming a greater rate of success than it achieved in North America.Our valuation already assumes a 13% EPS CAGR over the next five years, an acceleration on the 8% average generated during the past three. Our forecast hinges on continued strong performance in Germany and Austria, and ongoing expansion into additional European regions including Switzerland and Benelux. To justify a valuation closer to the current market price, the company would need to grow earnings per share by at least 20% per year during the next five years which is in line with our bull-case scenario. While the company has a solid track record, we believe this level of growth is unachievable, especially against the backdrop of a softening macro environment, and formidable competition in Europe. In our view, it is too soon to conclude the firm has sufficient brand power in Europe to expect the same success as in North America, which has grown by an average of 10% per year for the last decade.
The near outlook is unchanged, and the firm expects fiscal 2019 global product growth to be consistent with the last two years at the low-double-digit mark. The company is committed to increasing investment into marketing, research and development to 12% of sales, up from the current 11%, which should help maintain its brand awareness and product quality. This additional investment will limit margin upside and we see the firm’s EBITDA margins capped at around 16.0% on average over the coming years, from 15.5% currently.
Breville Group is engaged in the design, development, marketing and distribution of small electrical appliances. In Australia and New Zealand, Co. principally trades under its owned brands, Breville and Kambrook and also distributes a range of Philips products in the personal care and garment care categories under a license agreement with Philips. In North America, Co. distributes Breville branded products through several channels. In the U.K., the marketing and distribution of Co.'s designed products to retailers is under its owned brand, Sage.
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