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November 12, 2013 3:56 pm
There is no getting away from it. Henkel shares are expensive. The German consumer goods company, home to Schwarzkopf hair products and Loctite glues, trades on 21 times forecast earnings. That is a premium to its five-year average (15) and rivals such as Unilever and Reckitt Benckiser (18). Local peer Beiersdorf is one of the few European consumer goods companies to carry a higher multiple. If you believe that PE ratios revert to their mean, now is the time to get out of Henkel.
That is not a popular view. Shares in the company ticked up on Tuesday’s third-quarter results and are now up almost a third in the year to date. The numbers gave little reason for enthusiasts to lose the faith. The top line was hurt by foreign exchange movements but the underlying revenue growth number was 4 per cent. Progress on margins was even more impressive. The third- quarter operating margin was 15.5 per cent, 190 basis points higher than the same period last year. Lower raw material prices and a better product mix are both to thank.
There is not much that Henkel can do in the long term about either foreign exchange movements or raw material prices. Nevertheless, the company is aiming to battle through both to end up with €20bn of sales and 10 per cent annual earnings growth by 2016. If it gets there, it will be producing earnings per share of about €5.40 by then, against €3.70 in 2012. But that assumes it can keep its operating margin at 15 per cent, which is 300 basis points ahead of its five year average.
Acquisitions could put a different complexion on everything. Henkel has €485m of net cash and free cash flow is heading towards €2bn a year. Yes, reaching its 2016 targets will require higher capital spending, but there will be plenty left over. If Henkel can get its dealmaking right, €83 per share may not look like such an bad entry point.
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