EUR 850.00 For Business Accounts Only

Morningstar | We Are Encouraged to See Saint-Gobain Tackling Strategic Issues; Shares Fairly Valued

No-moat Saint-Gobain reported first-half results that met consensus but were below our relatively bullish expectations. Operating income for the first half was EUR 1.5 billion, up a modest 1.7% over 2017 on a like-for-like basis. Margins are tracking below our numbers in some business lines due to rising raw material and energy costs, and we appear to be underestimating the negative impact of currency headwinds. Accordingly, we may adjust our near-term forecasts down slightly, but we don’t expect this to have a material impact on our EUR 44 fair value estimate. At current levels, the shares look fairly valued.

Shares are reacting positively on July 27, which we think reflects two items in the release. First, organic growth accelerated in the second quarter, up 8% over the prior-year period. We would take this with a grain of salt, as it includes pent-up demand carried over from the first quarter, which was severely hampered by the harsh winter in Europe. Furthermore, the calendar effect contributed 1% and it was an easy comparative due to the cyberattack in 2017. Second, Saint-Gobain announced a plan to divest business lines representing about EUR 3 billion in sales by the end of 2019, which is expected to increase the operating margin by 40 basis points. In addition, the company is reviewing its organizational structure and expects to spend EUR 500 million per year on bolt-on acquisitions through to 2020. Strategic planning at Saint-Gobain has been in limbo for the past four years due to the proposed Sika acquisition being tied up in the courts. With that issue finally put to bed, we are pleased to see the company quickly taking action on strategic matters. While few barriers to entry exist in the majority of Saint-Gobain’s markets, a company of Saint-Gobain’s size and leadership positions should be earning better returns over the cycle, in our opinion.