Henkel's Revenue Beats Again but Consumer Business Struggling to Pass Through Inflation

Henkel reported strong organic sales growth of 3.5% year over year in the third quarter, with emerging markets offsetting a decline in North America, and adhesives technologies offsetting a disappointing performance in the consumer business. At this rate, Henkel seems likely to beat our full-year estimate of 3.4% reported sales growth, and we have tweaked our short-term forecasts accordingly, but this has no impact on our EUR 98 fair value estimate. We regard Henkel's shares as being undervalued and the current market price more than prices in "transitory" inflationary effects, which are causing the margin pressure apparent in management's lower full-year guidance. However, if inflation lingers beyond that, there could be downside to our estimates, and for the time being, we recommend investors seeking shelter from inflationary pressures look to companies with best-in-class gross margins and pricing power, such as the prestige cosmetics companies and distillers.