Essity: Evaluating Margin Pressure, Volume Risks, and the Path to Recovery in 2026

The Weight of Margins and Volumes: Essity’s 2025 Struggles

Essity’s Q2 2025 results underscored persistent margin pressures and volume risks, with net sales declining 6.6% year-over-year to SEK 34,185 million despite a 1.9% organic sales growth driven by price/mix adjustments [1]. The EBITA margin (excluding IAC) contracted to 13.7%, reflecting weaker volume growth, rising SG&A costs, and sector-specific headwinds. For instance, the Professional Hygiene segment faced a 12% revenue drop in the U.S. hotel and restaurant sector, while the Baby Care segment saw a 3% volume decline due to demographic shifts and competitive pricing pressures [2].

Analysts at Jefferies highlighted that Essity’s operating profit for 2025 is now projected to fall 3% below consensus, citing “squeezed margins and uncertain volume growth” as key risks [3]. The company’s cost-saving initiatives—targeting SEK 500–1,000 million in annual savings—remain critical to offsetting these challenges, yet execution risks persist amid macroeconomic volatility [4].

Valuation Dislocation: A Discount to Peers

Essity’s valuation metrics suggest a meaningful dislocation relative to industry benchmarks. As of September 2025, the company trades at an EV/EBITDA of 8.18x and a P/E of 14.15x, significantly below the Hygiene/Consumer Goods sector’s average EV/EBITDA of 10–14x [5]. This discount reflects investor skepticism about margin recovery and volume stabilization, particularly in mature markets. For context, peers like Estée Lauder (EV/EBITDA of 10.2x in Q2 2025) and Procter & Gamble (P/E of 21.9x) command higher multiples despite similar macroeconomic headwinds [6].

The disconnect is further amplified by Essity’s forward-looking guidance. While management aims for an EBITA margin above 15% by 2027 and organic revenue growth of over 3% annually, the current valuation implies limited confidence in achieving these targets. Analysts have priced in a 2026 re-rating scenario, with an average price target of kr288.75 (a 12% upside from the kr252.60 price in early 2025) [7].

Catalysts for Re-Rating: Margin Expansion and Strategic Shifts

Several catalysts could drive a valuation re-rating for Essity in 2026:
1. Margin Stabilization: Sequential improvements in gross margins—driven by higher pricing and cost discipline—could narrow the gap to its 15% EBITA margin target. The recent SEK 3 billion share buyback program also signals management’s confidence in undervaluation [8].
2. Volume Recovery in Key Segments: Targeted marketing and customer engagement in high-margin categories (e.g., Health and Medical) may offset declines in Professional Hygiene. Ulrika Kolsrud’s emphasis on “profitable volume growth” aligns with sector trends toward premiumization [9].
3. Structural Cost Savings: Progress on the SEK 500–1,000 million cost savings target could enhance operating leverage. For example, automation in supply chains and AI-driven demand forecasting may reduce SG&A costs by 5–7% by 2026 [10].
4. Sector-Wide Tailwinds: The Hygiene/Consumer Goods sector is projected to grow at a 4–5% CAGR through 2030, driven by green innovations and digital transformation [11]. Essity’s focus on sustainable products (e.g., biodegradable packaging) positions it to capture market share in this transition.

Risks and Mitigants

While the re-rating potential is compelling, risks remain. Persistent volume declines in the U.S. and Southern Europe could delay margin recovery, and trade tariffs may erode gross margins despite pricing power. However, Essity’s diversified product portfolio and strong balance sheet (net debt/EBITDA of 1.8x) provide flexibility to navigate these challenges [12].

Conclusion: A Case for Selective Optimism

Essity’s valuation dislocation presents an attractive entry point for investors willing to bet on its margin expansion and strategic reinvention. With a path to EBITA margin improvement, disciplined cost management, and sector-specific growth drivers, the company is positioned to outperform in 2026. However, execution risks—particularly in volume recovery—demand close monitoring. For now, the stock’s 12% average price target and undemanding multiples suggest a compelling risk/reward profile.

Source:
[1] Interim Report Quarter 2, 2025 [https://www.essity.com/media/press-release/interim-report-quarter-2-2025/f758b5b472623933/]
[2] Essity at a Crossroads: Margin Pressures and the Quest for Stability [https://www.ainvest.com/news/essity-crossroads-margin-pressures-quest-stability-2507/]
[3] Jefferies: Continued Pressure on Essity's Volumes and Margins [https://www.marketscreener.com/news/jefferies-continued-pressure-on-essity-s-volumes-and-margins-maintains-hold-recommendation-ce7c5cdfd189f02d]
[4] Essity Shares Fall as Q2 Profit Misses Forecasts [https://www.investing.com/news/earnings/essity-shares-fall-as-q2-profit-misses-forecasts-margins-decline-4138874]
[5] Global: EV/EBITDA Consumer Goods & FMCG 2025 [https://www.statista.com/statistics/1030134/enterprise-value-to-ebitda-in-the-consumer-goods-and-fmcg-sector-worldwide/]
[6] U.S. Consumer Staples Sector Analysis [https://simplywall.st/markets/us/consumer-staples]
[7] Essity AB (ESSITY-B.ST) Analyst Ratings [https://finance.yahoo.com/quote/ESSITY-B.ST/analysis/]
[8] Essity AB: Financial Data Forecasts [https://www.marketscreener.com/quote/stock/ESSITY-AB-35897701/finances/]
[9] Essity: Attractive Growth Plans Make Stock Appealing [https://seekingalpha.com/article/4738301-essity-attractive-growth-plans-make-stock-appealing]
[10] Consumer Products Report 2025: CPG Industry Outlook [https://www.bain.com/insights/consumer-products-report-2025-reclaiming-relevance-in-the-gen-ai-era/]
[11] Professional Hygiene Market Insights Report 2025–2030 [https://finance.yahoo.com/news/professional-hygiene-market-insights-report-101900524.html]
[12] Essity AB (STO:ESSITY.A) Statistics & Valuation Metrics [https://stockanalysis.com/quote/sto/ESSITY.A/statistics/]