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.)


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%
Colgate-Palmolive (NYSE:CL) 17.8 2.7 9.7%
Unilever PLC (NYSE:UL) 15.5 1.5 3.5%
Clorox (NYSE:CLX) 28.2 1.8 6.9%

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.)

Bottom Line
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.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  2. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  3. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  4. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  5. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  6. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  7. Stock Analysis

    The Safest Stocks You Can Invest in Right Now

    These stocks are likely to hold up better than others in a bear market, but there's a twist.
  8. Investing Basics

    5 Reasons to Expect Lower Stock Returns

    Lower stock returns are likely here to stay for some time. Here are five reasons why.
  9. Investing Basics

    What to Cut From Your Portfolio Right Now

    Owning stocks may shortly become too scary for your portfolio. Here's why, and here are some alternatives.
  10. Personal Finance

    Careers: Equity Research Vs. Investment Banking

    Equity research is sometimes viewed as the unglamorous, lower-paid cousin to investment banking. In this article, we compare the two careers.
  1. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  2. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  3. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  4. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  5. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  6. Impact investing

  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!