EUR 850.00 For Business Accounts Only

Morningstar | Cutting Henkel's Valuation Estimate After Management Lowers Guidance but Modest Upside to the Stock. See Updated Analyst Note from 20 Aug 2018

For the second successive period, Henkel disappointed on the top line in the second quarter, and is now not likely to meet our full-year estimates. Management has guided to slightly lower EPS growth this year. Accordingly, we have lowered our full-year assumptions and are cutting our fair value estimate slightly to EUR 117 from EUR 120 as a result. The most recent miss was primarily driven by foreign exchange headwinds, which strengthened due to emerging market currency depreciation. Looking through the short-term issues, however, we are retaining our medium-term assumptions of 3% organic sales growth and an EBIT margin of 18%. The market appears to be pricing in something slightly worse than this scenario, and we see modest upside from current prices.

Henkel reversed its first-quarter slowdown in North America, with almost 5% organic growth in the region. This is encouraging, and suggests that the supply chain disruptions reported in the first quarter have not dented Henkel's narrow economic moat. Other market trends remained little changed from the first quarter, but a slowdown in the Africa/MiddleEast and Asia-Pacific regions caused underperformance relative to our expectations. Foreign exchange tempered revenue growth by 6 percentage points.

Another slight cause for concern this quarter was the quality of the earnings. The reported EBIT margin slipped 60 basis points to 15.8%, despite lower reported marketing, selling and distribution expenses, a largely discretionary line item, which fell by EUR 50 million and provided a margin boost of just under a percentage point. With administrative expenses increasing, margin growth will be dependent upon Henkel reducing administrative costs, especially if near-term growth is slower than expected and commodity costs higher.

We are sticking to our medium-term assumption of an 18% EBIT margin, slightly below our estimate for competitors due to Henkel's overindexing to categories that we perceive to be competitive and subject to higher customer acquisition costs over time.