EUR 850.00 For Business Accounts Only

Morningstar | Henkel Beats on Margins in 4Q but Outlook Highlights Lack of Pricing Power. See Updated Analyst Note from 24 Feb 2019

Henkel’s fourth quarter was in line with our estimates on the top line, but the company posted a strong EBIT margin of 17.6%, above our forecast. Given the weak pricing power evident in the results, this is not likely to be sustainable next year, and those two factors offset each other from a valuation perspective, so we are likely to maintain our EUR 117 fair value estimate. Although we think it is priced in and the stock offers upside, we expect Henkel to suffer more than most from rising commodity cost inflation, and we do not see a near-term catalyst for the stock. For these reasons, we think a narrow moat rating remains appropriate.

Full-year organic sales growth was 2.4%, driven by emerging markets, which grew by 6.3%, including double-digit growth in the Africa and Middle East segment. Developed markets, on the other hand, remain weak with Western Europe flat and North America down 1%. Henkel was one of the few consumer staples companies to call out weakness in China emerging in the fourth quarter. By product segment, the adhesives business drove growth, with 4% organic growth in 2018, boosted by double-digit growth in aerospace. The beauty care business remains weak, however, down 0.7% last year in an organic basis. Volumes fell 0.7% in spite of no pricing being taken last year. This is disappointing given the strength in the broader beauty industry, particularly in prestige, and we think it reflects a lack of pricing power in Henkel’s brands.

Last year’s 2.4% organic growth, if repeated this year, is unlikely to be enough to offset rising commodity costs. Although Henkel beat our estimates, with a full-year EBIT margin of 17.6%, the company has guided to an EBIT margin of 16% to 17% this year, below our forecast. Pricing of 190 basis points last year is consistent with peers, but mostly came in the adhesive business. With limited pricing power in its consumer division, Henkel’s margins seem likely to suffer this year.