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First Quarter Results
This was an outstanding quarter for the company. Sales grew 4.8% to roughly $5.35 billion and operating profits 25.2% to approximately $717.92 million. Its operating margin increased 220 basis points to 13.4%. On an adjusted basis, excluding one-time and restructuring charges, operating profits increased 16.6% and margins improved by 130 basis points - both still very solid. Earnings improved 19.2% to about $1.16 per share. All three of its segments generated strong operating earnings with Laundry and Home Care leading the way, with a 56.4% increase. On the revenue side of things, all three segments delivered organic sales growth with its Adhesive Technologies business growing by 5.6%. Lastly, despite higher raw material costs, its gross margins were higher in the quarter.
SEE: Surprising Earnings Results
One of the main reasons to invest in Henkel and peers such as Procter & Gamble (NYSE:PG), Colgate-Palmolive (NYSE:CL) and Clorox (NYSE:CLX) is pricing power. By investing in companies that can routinely raise their prices due to the strength of its brands, you gain inflation protection that other investments do not necessarily provide. In the first quarter, Henkel's organic growth came exclusively from price increases and not increased volume. That kind of pricing power is helping it get through a difficult sales environment like the past few years. Once we work our way out of this seemingly never-ending economic malaise, it can add volume increases to the mix, creating even greater profits.
You might not feel it where you're living, but the economy's getting stronger. How do I know this? Henkel's North American business did incredibly well in the first quarter. Organic sales grew 6.3%, EBIT grew 64.8% and its operating margin improved by 480 basis points to 14.4%. Its North American business delivered the biggest improvement in operating margin of all six regions and its sales growth was second highest to only Africa/Middle East.
CEO Kasper Rorsted, who's led an impressive four-year turnaround of Henkel, said this about the U.S. in an interview following the release of its Q1 earnings: "It's an election year there, and I think it's important that you take that into consideration, but the North American economy is starting to pick up again." It's not just Henkel saying this, but it's music to everyone's ears. Make no mistake though, while the growth in North America is impressive, emerging markets are the most important part of its business, with 41% of overall sales in the first quarter. Consider North America its wildcard until Europe gets its act together sometime in the next decade.
SEE: Should You Invest In Emerging Markets?
The Bottom Line
Year-to-date, Henkel's stock is up about 22% as of May 9. I've highlighted some of the reasons why investors are tuning in to its story. Analysts believe it will be debt free (debt less cash) in 2013. The three peers I mentioned earlier currently have over $40 billion in debt combined. Yet all three have an enterprise value-to-EBITDA multiple that's higher than Henkel's. They might have higher margins, but they're not any better run and they certainly don't have the balance sheet Henkel does. For me, the choice is an easy one.
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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.