Business World

Saturday 16 December 2017

Brand leaders can usually roll with the punches

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'In any cupboard you’ll find Henkel products'

John Lynch

As an investor I'm irresistibly drawn to big companies that can ship a few bad knocks without running the risk of being flattened. Take Henkel, the German consumer goods specialist, for instance.

It has just told the world that some of its markets will 'stagnate,' nevertheless its €16.4bn sales will bounce along nicely this year and could end the year 5pc up. Meanwhile, its margins on sales will be around 16pc.

And, no, the directors are not worried about their major investments in Russia and in the Ukraine. The board 'believes' in both countries.

That's what I call stylish multinational rhetoric, even from a company that was previously fined by the French authorities for price-fixing.

Peep into any cupboard in any part of the modern world and you will find Henkel products. It owns Persil washing powder, Loctite glues, Schwarzkopf shampoos and a host of other products used in industrial as well as domestic settings.

Headquartered in Dusseldorf in Germany, it employs 50,000, is valued at €45bn, and trades in 130 countries. Henkel started out as a laundry products company and launched the Persil brand in 1907. It branched into glues during the First World War and entered beauty care after WWII. It believes in buying good businesses with lots of stamina. The Loctite and Schwarzkopf brands prove the point while, of course, Persil continues to 'clean up'.

Today, the company has three business units: adhesive technology, laundry/home, along with the portfolio of well-known brands that comprise its beauty care division.

Its top 10 brands account for almost 60pc of sales and the top three brands, Persil, Loctite and Schwarzkopf, have a staggering €5bn in sales between them. The CEO, the Danish-born Kasper Rorsted, has been consolidating the brands since he took over and has a programme of injecting resources into the strongest brands. He has also cut the number of production facilities by a quarter. Europe is still the dominant market with one third of all sales - almost double that of North America.

The adhesive technology business is used by industry and consumers. In industry it is used in aerospace, electronics, automotive and industrial assembly. Adhesive is Henkel's dominant division, with half of the group revenue. While its top brand, Loctite, accounts for €2bn of sales. New products launched in the last five years now account for a third of the division's sales. A significant bolt-on last year was the acquisition of the US Company Bergquist, a supplier of adhesive solutions for the electronics sector.

The laundry/home care portfolio includes washing powders, toilet care, surface cleaners, air fresheners, with brands like Persil, Purex and Pril. This business generates €4.6bn of sales. To further strengthen its position in the mature European market, Henkel acquired the French company Spotless Group for €940m with brands like Dylon and Colour Catcher. Its beauty care business generated €3.6bn with the Schwarzkopf brand accounting for over 60pc of sales. Reported sales last year were slightly above the previous year while operating profits at €2.6bn were marginally ahead.

Henkel's share price at €94 is just short of its 10-year high, its price earnings multiple is a hefty 23 and has a stingy dividend yield of 1.3. It was rumoured one of its competitors was considering a bid, but the increase in share price moved it beyond its price range.

Another factor which might have 'moved' the price but didn't was the decision by the French competition watchdog body that found Henkel and other major companies were price fixing shampoos, toothpaste, air fresheners and other products, the companies meeting secretly to set pricing policies. Big fines for market manipulation are not an uncommon feature of big business.

On the positive, Henkel is looking at earnings growth this year and lower oil prices should reduce its cost, but with its high multiple and low dividend, it is not an attractive investment at this time.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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