When you think of consumer goods companies, what are some of the names that come to mind? Procter & Gamble (NYSE:PG), Colgate-Palmolive (NYSE:CL), Unilever PLC (NYSE:UL) and Clorox (NYSE:CLX) are some of the giants that immediately come to mind. Henkel AG (OTC:HENKY), a 134-year-old German company founded by Fritz Henkel in 1876, is not on most people's lists. In fact, the company is relatively unknown to American investors, although many of its brands - including Right Guard, Fa, Dep, Purex and LePage products - are not.
Its stock is available over-the-counter as an ADR. In the past year, its depository receipt is up 36%, beating the S&P 500 by 22%. Despite its strong performance and the fact that it is trading near a 52-week high, it's reasonably priced compared to its peers. If you're interested in owning a defensive stock with the potential for capital appreciation, Henkel represents an excellent alternative to the usual crowd. (To learn more, check out Analyzing Retail Stocks.)
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Henkel Vs. Its Comsumer Goods Peers
|Company||P/E||P/S||5-Year CAGR Operating Profit|
|Henkel AG (OTC:HENKY)||17.0||0.8||5.5%|
|Procter & Gamble (NYSE:PG)||17.4||2.5||8.3%|
|Unilever PLC (NYSE:UL)||15.5||1.5||3.5%|
The table illustrates the valuation gap that exists between Henkel and its peers, especially when it comes to price-to-sales. The question is whether it's justified. Henkel's median operating margin over the past decade is 10.2%, lower than all four of its peers. P&G and Colgate-Palmolive both have median operating margins that are double Henkel's, so clearly the German company isn't generating nearly as much from its revenues. But is that enough to justify such a large gap in the valuations? Henkel's five-year compound annual growth rate for revenue is 4.7%, 210 basis points lower than P&G, which has the highest CAGR of the bunch. However, its growth rate for revenue is 260 basis points higher than Unilever's and virtually the same as Clorox, so at least in terms of price-to-sales, Henkel appears to be getting a raw deal.
On the earnings side of the equation, Colgate-Palmolive and P&G have five-year compound annual growth rates in their operating earnings that would appear to justify an expanding multiple. Both have price-to-earnings ratios that are double their CAGR. This is not where the valuation quandary lies. Rather, it's primarily with Clorox and secondarily with Unilever. Henkel's outperformed Unilever in both revenue and operating earnings growth over the past five years and equaled Clorox's growth rates; yet Henkel trades at a lower P/E than Clorox and a at lower P/S than either company. At the very least, Henkel's P/E is reasonable while its P/S multiple should be somewhere between of 0.8 and 1.5. If we split the difference, you get a revised P/S of 1.2, which translates into a stock price of $87.52, 51% higher than where it's currently trading. (For more, see How To Use Price-To-Sales Ratios To Value Stocks.)
Future Growth for Henkel
Henkel has three business segments: Laundry and Home Care, Cosmetics/Toiletries and Adhesive Technologies. Forty-eight percent of overall revenues in 2010 came from the Adhesive Technologies segment, by far the largest of the three. Since profitable growth is the name of the game, several things about Henkel jump out at me. In 2010, its largest operating segment delivered 11.8% organic sales growth, more than the other two divisions combined. Yet the rate at which the other two divisions create new products (Henkel calls this the "innovation rate") is substantially higher than that of the adhesives division. This tells me that the Laundry/Home Care and Cosmetics/Toiletries segments will look completely different in five years and change is always good for consumer products. I'd expect organic sales in both segments to continue to increase as new products achieve consumer acceptance. Henkel's geographic diversity in terms of revenue is very compelling. Emerging markets account for 41% of sales, larger than its home market in Western Europe. More importantly, the key Asia/Pacific region has the highest EBIT margins in the company. It's growing revenues and profits in the right places and eventually investors will recognize this. Lastly, Henkel's outlook for 2011 calls for revenue growth between 3% and 5%, substantially below the 11.2% growth in 2010, which many analysts considered a bounce-back year. This is a conservative forecast in my opinion.
Henkel's First Quarter Results
Analysts were expecting first-quarter revenue and adjusted EBIT growth of 6.6% and 7.4% respectively. The actual numbers were 8.9% and 12%. They weren't even close, which prompted CEO Kasper Rorsted to suggest 2011 revenue growth would be closer to 5%, the top end of its guidance. Unless the global economy goes into the tank, there's almost no chance that Henkel will fail to beat its conservative guidance, especially if it is able to acquire the Sanex brand (deodorant and shower gels) from Unilever prior to the second half of the year. Rumor has it that Procter and Gamble is the leading contender, but anything can happen when it comes to mergers and acquisitions. At an expected price tag of $1 billion, Henkel can certainly afford to make the acquisition. Unfortunately, P&G's resources are even greater. Given management's conservative nature, it likely won't engage in a bidding war. Either way, I see nothing but good news in the coming quarters. (To learn more, see Mergers And Acquisitions: Understanding Takeovers.)
If you're the type of investor who likes to run with the crowd, P&G's your stock. However, if you have a contrarian streak, Henkel's may be more your style.
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