Puma: Initiating Coverage With a EUR 49 Fair Value Estimate and No-Moat Rating; Shares Fairly Valued

We are initiating coverage on sportswear firm Puma PUM with a no-moat rating and a fair value estimate of EUR 49 per share, leaving shares valued fairly. Our Morningstar Uncertainty Rating is High, and our capital allocation rating is Standard.

Although we do not believe it has achieved a moat, we view Puma as a leader in global activewear. Since 2014, its annual sales have risen to more than EUR 8 billion from EUR 3 billion as it has expanded distribution, introduced new products, and stepped up its marketing. At 2.5%, the brand had the fourth-largest share of the fragmented, but attractive, $372 billion sportswear market in 2022 (Euromonitor). However, Puma must contend with market leaders wide-moat Nike and narrow-moat Adidas, as well as numerous other strong players.

Footwear accounts for about half of Puma’s sales. It has a solid association with international football (soccer) given its long history with the sport and sponsorships of high-profile clubs and players. However, in general, Puma lacks the premium positioning of some athletic performance peers as its products are viewed as casual. In the U.S. (about 25% of its sales), the brand is exposed to low- and mid-tier retailers and has lower distribution through performance sporting goods stores. In the fast-growing Chinese sportswear market, Puma trails several local and multinational brands with sub-2% share.

After two strong years, Puma’s results are expected to moderate in 2023 due to slowing consumer spending on apparel and lower orders by its wholesale partners. Barring a deep recession, we anticipate sales will begin to strengthen in the fourth quarter in both North America and Western Europe. Meanwhile, we forecast 16% sales growth for Puma in Asia/Pacific in 2023 as it benefits from the lifting of COVID-19 restrictions in China. Over the next decade, we forecast Puma’s compound average annual sales growth at 7% and anticipate its operating margins will trend up to 10% from 7% this year.