Switch to European European Personal Care Stocks from European Household Stocks

October 04 00:00 2011

NEW YORK, October 4 (RainbowNewsLine.com) – UniCredit Bank suggests that investors should consider switching from European Household (Henkel, Reckitt Benckiser) to overweight European Personal Care (Beiersdorf, L’Oreal). It has been observed that Household’s EPS & EBITDA have started to weaken over time. The step to raise prices of products by P&G either will lead to decline in sales volume or will attempt to compensate the rising inflation cost. On the other hand, Personal Care players let go of their EBITA margins for counter advertising supports.

According to UniCredit Bank, traditionally investors have enjoyed the gains for being overweight for European Household Care (Henkel/Reckitt Benckiser) and underweight for European Personal Care (Beiersdorf/L’Oreal). Over the last five years, Household Care has been surpassing the Personal Care by over 60%, but this occurrence is ending eventually.  The analysts believe that the time has come when Household Care will have to cut down on their future EBITA and strengthen their cyclical advertising support.

European Household Care

  • HENKEL: Analysts of UniCredit bank have reiterated HOLD rating on share of the Henkel. The spot price is €39.50 and is expected to reach €41 in next 12 months.
  • RECKITT BENCKISER: The analysts have reiterated their HOLD rating on share of Reckitt Benckiser. The current price is €32.50 and projected to achieve €35 in coming 12 months.
European Personal Care Stocks
  • BEIERSDORF:  Analysts have given the same rating again of HOLD on the share of Beiersdorf. The spot price is €40 and the target price has been set at €45 for 12 months’ time.
  •  L’Oreal: Analysts have shown strong sentiments towards L’Oreal and have reiterated BUY rating on share of L’Oreal. The current market price is €72 and is expected to reach €86 in a 12 months’ time.

The household players have taken steps to improve their margin expansion but such steps had a twofold effect, according to UniCredit Bank. Henkel continued to strive for abnormal cost savings through ‘big bang’ restructuring over the last two years, whereas Reckitt’s major margins expansion comes from its heavy concentration in pharmaceutical operations that is being subdued by generic competition and lower margin shares. Therefore, according to analysts, investors should not expect the uptrend of Household players for long.

The Personal care players already have an outstanding gross margin of 70% that is itself is the highest in its peers. Therefore, the analysts do not expect any cost saving or artificial pulling of margin attempts from the company’s side. The outperforming higher margins show that this sector is well positioned as compared to other household sectors. The analysts believe that the household care operators are neglecting brand building and rather deflecting support to markets in US and Europe which may cause EPS degradation.