EUR 850.00 For Business Accounts Only

Morningstar | In-Line 3Q for Henkel Amid Encouraging Margin Improvement; Shares Undervalued

Henkel reported third-quarter results that were slightly above our forecasts but did not affect our EUR 117 fair value estimate for the preferred shares. Recent headwinds remained prevalent in the third quarter, namely foreign-exchange headwinds and commodity inflation. Henkel is currently performing slightly below our medium-term assumptions, with the beauty care segment particularly sluggish, but looking through the short-term issues, we are retaining our narrow moat rating and 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.

Third-quarter organic growth of 2.7% is underwhelming and a sequential slowdown from the first half of the year, but it is indicative of the challenge of raising prices in an environment in which consumers are price-sensitive. The adhesives business drove growth with 3.8% growth, supported by reasonably healthy industrial production. The consumer business is facing mixed fortunes, however. Organic growth of 2.5% in laundry and home care, driven by emerging markets, is within our medium-term expectations for growth in a fairly competitive category. However, our valuation depends on an improvement in growth in the beauty care business, which grew just 0.5% in the third quarter.

Our valuation also depends on EBIT margins being sustained at 18%. After adjusting for restructuring and one-time items, the third-quarter margin of 18.4% was an improvement of 40 basis points from both the same period last year and the first half of this year. This is encouraging, but we suspect creeping commodity inflation may bring margin headwinds over the next year or two, given the difficulties of passing through commodity cost inflation apparent in the beauty segment this quarter.