Why Goldman Is Buying This Large-Cap German Chemicals Stock

• Shares of HENKEL AG AND CO. KG HENKY have been volatile in 2015 and continue to trade around their January level of $96.
• Goldman Sachs’ Rosie Edwards upgraded the rating on the company from Neutral to Buy, while raising the price target from €93 to €118.
• The market appears to be underestimating the company’s margin expansion potential, Edwards stated.

Analyst Rosie Edwards believes that the market is underestimating the future margin expansion potential of Henkel. Recent announcements by the company indicate a refocus on self-help measures, where management has a proven track record.

Henkel’s operating margins are expected to expand 200bp by 2020 mainly due to the adhesive division.

“This, in addition to our use of cash forecasts, drives average operating profit and EPS growth of 11% and 12% pa, respectively (2015-20E), ahead of the sector average (8% and 9%), yet the shares trade at a 15% discount (on our forecasts) on 12- month forward P/E,” Edwards mentioned.

The analyst believes that Henkel’s operating margin guidance of 16 percent for FY15 is conservative and expects it to record 16.3 percent. The EPS estimates for F2015-17 have been raised by 7 percent, 9 percent and 11 percent, respectively, to reflect margin expansion.

“We argue that Henkel should trade in line with our staples sector, with superior operating profit and EPS growth offset by weaker cash returns,” Edwards wrote, while adding that the key risks to the company’s robust performance include deterioration of growth in China , input cost inflation, management change and reduced self-help measures.