In an effort to grow their businesses, household and personal-care products companies are looking to improve their margins, introduce new and enhanced products, acquire other companies and/or increase penetration of emerging markets.
Firms in this sector are applying these strategies because, with brand loyalty fading in the industrialized world, there isn’t a lot of pricing power and it’s tough to increase market share. Given these factors, launching new or enhanced products is the best way to raise prices, while consolidation becomes an excellent way to increase market share as well as get into high-growth categories in which a company doesn’t already have a significant presence.
For instance, Britain-based Reckitt Benckiser PLC bought Boots Healthcare International from Boots Group PLC in February 2006, greatly expanding its presence in the over-the-counter remedies and treatments market.
And getting in the door early in emerging markets can give a company a stranglehold. New York-based Colgate-Palmolive Co. has a 70%-80% share in the oral hygiene market in Latin America, while Kimberly-Clark de Mexico SAB de CV enjoys market domination in Mexico — 45%-70%, depending on the product.
But even without these kinds of successes, consumption of household and personal-care products is so low in much of the emerging world that just achieving a significant presence can add substantially to earnings.
The other way to im-prove earnings is through better margins. Reckitt has focused on this tactic, increasing its operating margin to an industry best 21.5% in 2006 from 14.1% in 2000. Some analysts believe there’s more improvement to come.
Henkel KGaA of Germany is attempting to go the same route. A number of analysts are skeptical so far, but if the firm can pull it off, investors will be rewarded.
Both Reckitt and Henkel are also in emerging markets and expect some of the margin improvement to come from greater efficiency in those regions.
Here’s a closer look at the four companies:
> Colgate-Palmolive Co. This company benefits from toothpaste, the one product segment in which people tend to use the same brand all their lives. Colgate toothpaste is the biggest global brand, with a 37% market share; Crest, made by Cincinnati-based Procter & Gamble Co., has a 34% market share. But even in oral hygiene, product enhancements can expand sales and allow companies to charge more for their products. Colgate is known as a very good innovator.
Both Stéphane Champagne, portfolio manager at Signature Advisors, a unit of CI Investments Inc. in Toronto, and Patricia Fee, money manager at IG International Management Ltd. in Dublin, recommend Colgate.
New York-based Argus Research Co. had a “buy” rating on the company in its March 9 report, with a 12-month target price of $76 for the stock, up 13% from the $66 at which the shares were trading in mid-April on the New York Stock Exchange. (All dollar figures are in U.S. dollars.) The New York office of UBS Ltd. rated it a “buy” in a Jan. 30 report, with a slightly lower price target of $75 a share.
Colgate went through a restructuring in 2004 and is rolling out a program globally to reduce energy and other costs. UBS believes the resulting savings and reinvestments, combined with moderating input costs, will translate into 11% annual earnings per share growth — “with high potential for upside surprises,” states the report.
Champagne expects EPS growth of 11%-14% in 2007 and 2008. He particularly likes the company’s Latin American exposure. The region accounted for $3 billion, or 29%, of the $10.6 billion in sales for oral hygiene and home- and personal-care products in fiscal 2006, ended Dec. 31. Latin America is Colgate’s most profitable region, accounting for $873 million, or 37%, of the $2.4 billion in operating income.
Fee also likes the emerging markets exposure — and there’s $2 billion, or 19%, of sales from Greater Asia and Africa. She adds that Colgate also has a focus on developing premium-priced products in the U.S. and Europe.
Argus says Colgate is undervalued, noting that it maintained market share in the U.S. toothpaste market despite the launch of a premium Crest brand.
Net income was $1.4 billion in 2006, almost unchanged from 2005. Net sales were up 7.4% to $12.2 billion, with $4.7 billion from oral-care products, $3.1 billion from home-care products, $2.8 billion from personal-care products and $1.7 billion from pet nutrition products. Long-term debt was $2.7 billion.
@page_break@> Henkel KGAA. This is the top pick for Charles Burbeck, head of global equities at HSBC Halbis Partners in London; New York-based San-ford C. Bernstein & Co. has a “buy” rating on the company; Fee likes Henkel as a trading opportunity; and UBS rates it “neutral.”
Bernstein’s 12-month target price for Henkel’s preferred shares is 146 euros, while UBS’s is E130. The widely held shares were trading at E110 in mid-April on Xetra, the electronic cash market trading system of the Deutsche Börse. (There are also ordinary voting shares, of which 51.5% are owned by the Henkel family.)
Burbeck prefers Henkel to Colgate. Henkel has broad product diversification, although its brands aren’t as powerful, and also has an industrial/retail adhesives business, which accounts for more than 40% of sales. The company recently completed a restructuring, which should improve margins.
Management has been given more control in the past three or four years, resulting in better management of brands, some acquisitions and very good growth in emerging markets, says Burbeck.
In a Jan. 25 report, Bernstein stated that there is huge upside potential for the margins, given the gap between Henkel’s current single-digit level and the 15%-16% peer average. It thinks the 60- to 70–basis-point margin improvement it expects in 2007 will improve investor sentiment, particularly if a share buyback program is initiated.
However, in a Feb. 14 report, UBS’s London office was dubious about Henkel meeting its 12% operating margin target for 2008, although UBS considers the merger of Henkel’s consumer and industrial adhesives businesses a step in the right direction.
Fee believes Henkel will attain higher margins in the future, but thinks the move upward will be rocky, particularly as “it is dependent on cost-cutting, which is not always predictable, especially in Germany.” Thus, she recommends buying in when the stock is depressed, as it is now, and taking profits when it moves up.
Net income was E871 million in fiscal 2006, ended Dec. 31, up 13.1% from E770 million in 2005. Sales were E12.7 billion vs E12 billion. Long-term debt was E2.3 billion as of Dec. 31.
> Kimberly-Clark De Mexico Sab De Cv. This is a pure play on the emerging markets theme to take advantage of the better revenue growth prospects, due to the low penetration of consumer staples in Mexico, better profitability and far superior operating margins, says Patricia Perez-Coutts, money manager for AGF Funds Inc. in Toronto.
KCM’s sales have increased 10%-12% vs 2%-5% for Irving, Tex.-based parent Kimberly-Clark Corp.’s sales in the U.S. And KCM’s operating margin was close to 28% in 2006 vs the mid-teens for the parent, which owns 45% of KCM.
UBS had a “neutral” rating on KCM in a September 2006 report, with a 12-month price target of Mex$45 ($4.10) a share. The shares were trading at Mex$51 ($4.70) a share in mid-April on the Bolsa Mexicana de Valores.
Both KC’s and KCM’s products are paper-based, and pulp prices have increased. But Perez-Coutts points out that KCM has more pricing power than its parent and KCM’s sales are also moving up the value chain, which means higher prices.
UBS says KCM’s margins should improve with the sale of its low-margin, capital-intensive industrial products division, which will give the company a “sounder” balance sheet and should improve return on capital and margins. However, UBS wants to see higher earnings growth before it rates KCM a “buy.”
KCM had net sales of Mex$20.1 billion ($1.8 billion) in fiscal 2006, ended Dec. 31, up 8.1% from Mex$18.6 billion in 2005. Net income was Mex$3.5 million, a 16.9% increase from Mex$3 billion the year prior. Long-term debt was Mex$5 billion as of Sept. 30.
> Reckitt Benckiser Plc. Burbeck likes this company “a lot,” and both Bernstein and UBS have a “buy” rating on it, with respective 12-month price targets of £32 and £28 a share vs the £26 that the shares were trading at in mid-April on the London Stock Exchange. UBS notes that Reckitt is trading at a premium, but believes this is justified by its superior revenue growth and industry-leading margins.
The company is primarily in the household products sector but has expanded into personal care with the Boots purchase. Burbeck calls Reckitt both very aggressive and focused, and he notes its strong presence in emerging markets, which account for about 20% of sales.
Both Bernstein and Burbeck commend Reckitt’s management — which Bernstein calls “top-of-class among its peers.” Bernstein expects margins to increase an average 90 bps in 2007-09, leading to a 14% annual EPS increase.
The improvement in margins will come from greater efficiency in emerging markets, cost synergies as a result of the Boots acquisition and ongoing cost-savings programs.
Net income was £674 million in fiscal 2006, ended Dec. 31, down from £669 million in 2005, but only because the company had £149 million in pre-tax restructuring costs in 2006. Net revenue was £4.9 billion vs £4.2 billion. Reckitt had virtually no long-term debt as of Dec. 31. IE
Household and personal goods companies’ growth routes vary
As a result of fading brand loyalty, firms in the sector are implementing various strategies to grow their businesses
- By: Catherine Harris
- April 30, 2007 October 31, 2019
- 15:12