Henkel Earnings: Another Challenging Year on the Horizon but Longer-Term Prospects Are Unchanged

Narrow-moat Henkel HEN reported full-year 2022 results that largely tracked our expectations, with an adjusted operating profit of EUR 2.4 billion roughly in line with our EUR 2.3 billion forecast. Despite largely unsurprising results, a somber 2023 guidance sent shares down 3% on the day. Management expects continued macroeconomic headwinds to result in a slowdown in both industrial production and consumer spending, translating into muted organic sales growth for the company and an adjusted operating margin in the range of 10% to 12%—significantly below pre-inflation and prepandemic average levels (of 13.4% and 17%, respectively).

We believe shares remain undervalued, however, as we expect many of the current challenges to abate over the long run, especially as Henkel makes headway on initiatives that target operational efficiency gains. Macroeconomic headwinds are not unknown, and our forecast already reflected a material slowdown in sales growth in 2023 and an adjusted operating margin of 11%. Our long-term forecasts remain unchanged, and our fair value estimate rises by 1% to EUR 82 based on the time value of money.

Henkel’s reorganization announced last year—merging the beauty care and laundry and home care units into one integrated consumer business unit—is now live. The firm expects efficiency gains and improvement in top-line momentum as a result. We’re skeptical that the combination will lead to a sales uplift as we don’t believe there is much marketing and innovation expertise to be shared between the two units. Moreover, many peers, such as Unilever, have recently gone the opposite route, breaking out divisions into distinct business units in order to place more focus on specific marketing needs and increase management’s accountability. However, we appreciate the potential efficiency gains, especially pertaining to procurement, production, and logistic network optimization, which should support margin recovery amid growing customer acquisition costs.