This past weekend, the annual meeting for Berkshire Hathaway (NYSE:BRK.A, BRK.B) was held in Omaha. One of the topics up for discussion was Warren Buffett's admission that it had tried unsuccessfully to make a $22-billion acquisition recently but was unable to come to terms with the unnamed company. Almost a year ago to the day, I wrote about Henkel AG (OTCBB:HENKY), one of the world's biggest (and unknown) consumer and industrial goods company. With an enterprise value of almost $28 billion; it might be out of Buffett's reach, but it shouldn't be out of yours.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.
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

Pricing Power
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.

North America
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.

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



At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    How Toyota Succeeds at Home and Abroad (TM)

    Japan's biggest car manufacturer is also one of North America's biggest, delighting shareholders with its high profit margins.
  2. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  3. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  4. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  5. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  6. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  7. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  8. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  9. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  10. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
COMPANIES IN THIS ARTICLE
Trading Center