Stock Price: €38,8 ($56.75)
Conclusion: Beiersdorf (BDRFF.PK) looks expensive based on our valuation range of €34-36 ($50-53) per share.
We find the stock expensive for two reasons:
1) Visibility remains low for H2
- Low consumer confidence and rising unemployment do not bode well for fast recovery in cosmetics. As a result, Beiersdorf management forecasts the market to be slightly down this year. In addition, according to CEO, “destocking is still ongoing as some retailers just started the exercise this year”.
- Beiersdorf is still too dependant on mature Western European markets which accounts for 56% of cosmetics sales and where consumption is expected to remain depressed.
- Unlike some of its competitors which started to decelerate in H2 last year, Beiersdorf will continue to face tough comparison in its personal care division in Q3 and Q4.
- H2 should not be easier in adhesives where management expects demand from industrial customers to stabilize on a lower level.
2) Future growth should be more expensive
- Marketing and selling expenses rose by 150bp of sales in H1 2009 versus H1 2008 to 48.9% of sales. We believe that marketing spending which account for the bulk of it (967m in H1) are mainly responsible for the increase. We think that these figures speak for themselves at a time when media rates went down around 15% in the sector. We believe that downtrading might persist and force Beiersdorf to invest more behind its products either through media channels or in its points of sales.
- Margin has been heavily impacted by the acquisition of a Chinese hair care business in 2007. We estimate the “loss” at around 100bp of sales at the group level. Management does not provide much information on China and it is unclear how long it will take to regain a reasonable margin level.
- Last, the crisis has led companies to abandon their premiumisation strategy and refocus on more basic products offering value for money which is exactly what the “blue box” is about. Nivea will have to compete against new comers in the value segment, like L’Oreal for instance.
Beiersdorf trades at 24x and 20x P/E based on 2009 and 2010 estimates vs 19x and 17x respectively for L’Oreal. We believe that such a premium would require a superior visibility which is not the case today. We understand that Beiersdorf might benefit from recurring rumors related to the potential disposal of its cyclical adhesives Tesa business or a take over from P&G (PG)…However, although we agree on the logic of such moves, we would disagree on the timing. We don’t think that selling Tesa at the bottom of the cycle or cosmetics when the group has just started to invest in China is the best way to create shareholder value.