EUR 850.00 For Business Accounts Only

Morningstar | Lowering Our Valuation of Henkel Due to Rising Customer Acquisition Costs

After several years of impressive margin expansion--Henkel's reported EBIT margin grew from 11.3% in 2011 to 15.7% last year--we believe the low-hanging fruit has been picked and that continued financial improvement will become more incremental than transformational.Henkel's 2020+ strategy lays out its medium-term targets of 2%-4% organic sales growth, mid- to high-single-digit adjusted EPS growth at constant currencies, and growth in free cash flow. Notably, EBIT margin expansion is implied, but not quantified, and we believe there are limits to Henkel's remaining margin opportunity. We have identified laundry care, one of Henkel's core businesses, as being fairly commoditized and possessing weak pricing power; this is the primary reason that our moat rating is narrow rather than wide. We also anticipate this exposure to be a drag on growth, and we forecast a medium-term organic sales growth rate of 3%, around 1 percentage point below large-cap competitors due to weaker price/mix. which should limit gross margin expansion.Beyond margins, another critical question for investors is whether Henkel--and, indeed, most consumer staples large caps--can reignite growth by allocating more resources to customer acquisition costs while maintaining or increasing margins. Management has implemented some zero-based budgeting principles and believes it can achieve EUR 500 million in annual cost savings per year by 2020, in addition to acquisition synergies. We now forecast a normalized EBIT margin below 17%, almost 2 percentage points below that of Unilever, owing to lower scale and concentration in some particularly competitive categories. We think higher promotion and advertising expenditure will be necessary in the long run to support a 3% organic growth rate in these categories, so we are skeptical that all of these savings will flow to the EBIT line.