Beiersdorf

Stock price: €43
Conclusion: Q1 confirms tougher competition in cosmetics offset by better than expected results in adhesives. We reiterate that the stock looks fully priced.

Q1 results: Group sales up 6.9% to €1.53bn-EBIT up 28%-EPS +23%. Guidance 2010 upgraded to EBIT margin above 11% in consumer, EBIT margin above 8% at Tesa, net profit margin 8%.

Nivea facing tougher competition
Beiersdorf reported 4% growth in Q1, underperforming both L’Oreal and Unilever.
-Nivea grew by only 3.4% in Q1, reflecting weak consumer demand in Eastern and Southern Europe coupled with disappointing growth in Asia. The only good news came from North and Latin America which are showing double digit growth albeit from a small base.
- Cash flow was down (-3%) in consumer. We find the decline in gross cash flow surprising as it compares with last year, which was down 26% versus Q1 2008.
-It remains to be seen whether Beiersdorf’s investment in China will pay off. According to management, Beiersdorf lost €55m in China last year, owing to increased marketing spending. Nonetheless, sales are not taking off, while margins remain under pressure.

Tesa’s recovery stronger than expected
-Sales bounced back 20% in Q1, helped by easy comps.
-However, sales growth in the automotive industry might slow down for the rest of the year.
-We think that margins could exceed management target of 8% owing to the positive impact of the restructuring measures taken last year.

Beiersdorf trades at 20.6x P/E and 9.4xEV/EBITDA based on 2010 estimates, which suggests limited upside potential. Our slight upgrade (valuation range of €45-€48 per share) stems from Tesa’s recovery.

Beiersdorf

Stock price: €44.2
Conclusion: Competition is getting tougher in the value end of the market in Europe, while expansion in new geographies is expensive…Reiterating that the stock looks fully priced at 23xP/E based on 2010 estimates.

2009 results: Sales down 3.7% to €5.74bn (up 1.2% organic in consumer). EPS down 24% to €1.65. Guidance 2010: sales growth faster than market-EBIT margin above 10%. Net Profit margin around 7%.

Life is getting tougher for Nivea.
-At first sight, Beiersdorf outperformed L’Oreal last year with 1.2% organic growth versus -1.1% for its competitor.
-A closer look leads us to a different conclusion. Beiersdorf sales are essentially driven by Nivea (74% of the consumer revenues) which is positioned in the mass market segment. This segment has been growing by around 2-3% last year thanks to emerging markets. Nivea grew by only 1.3%, implying some loss in market share against L’Oreal’s reported growth of 3.2% in the segment. The gap is even wider with Unilever or Henkel.

Beiersdorf is facing two challenges
-An increasingly crowded marketplace with new comers in the value segment where the growth is. L’Oreal which used to compete at the premium end of the mass market is now competing in more basic fields, such as deodorants for instance or spending more behind affordable brands such as Garnier.
-The need to invest outside Europe, where Nivea is expanding rapidly but at a heavy cost. Western Europe still accounted for 53% of sales last year. Over the last five years, sales in America and in the Rest of the world have expanded at a CAGR of 7% and 18% pa respectively, but profits are lagging behind as the group is investing in marketing spending.
- The risk exists to see intensified competitive pressure in Europe combined with continuing investments in Asia and America. Therefore, Beiersdorf might struggle to get back to 13% margin.

Beiersdorf trades at 23xP/E and 11xEV/EBITDA based on our 2010 estimates (EPS €1.91-EBITDA€770m). Although Beiersdorf will continue to be supported by take over speculation, we think it is fundamentally fully priced, even based on our DCF based valuation (€42-€44 valuation range).

Beiersdorf

Stock price: €45
Conclusion: Low single digit growth in cosmetics does not justify 22x P/E based on 2010 estimates. The stock looks fully priced in light of our valuation range of €41-€43 per share.

2009 preliminary results: Sales down 3.7% to €5,7bn (+1% organic growth in cosmetics, -12% sales in adhesives). Net earnings down 23% to €379m. Guidance 2010: Beiersdorf will grow faster than the market..

We’re waiting for detailed numbers which will be given on March 4.
-Q4 does not show any acceleration in growth for cosmetics, with sales up only 2%, even slightly below Q3 on our estimates. It seems that sales in Western Europe continues to struggle.
-Marginwise, Beiersdorf has lost 90bp in cosmetics last year (11% of sales).
-The relatively good news came from Tesa, showing a return to slight growth in Q4 (+2%), coupled with higher operating results than expected.
-Net earnings of €379m imply negative financial income, which we find difficult to understand, given the net cash position of Beiersdorf.

2010 offers little visibility on the cosmetics side. Management did not comment on the current market conditions, which does not help to make forecasts. Nevertheless, rising unemployement combined with increased competition in the value end of the market should hold back recovery in cosmetics. In addition, from a profit standpoint, Beiersdorf remains highly dependant on European markets, as it is heavily investing elsewhere.
Tesa should benefit from better prospects linked to its cyclical nature.

Beiersdorf

Stock Price: €38,8
Conclusion: Beiersdorf looks expensive based on our valuation range of €34-36 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…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.

Beiersdorf

Stock price :€32,05
Conclusion: Stock remains expensive

2009 Q1 results: sales down 4% like for like, 5,6% reported; EBIT down 26% ; net results down 30,5%
Management expects full year sales and EBIT margin to remain below the 2008 figure.

Following an excellent performance last year, Beiersdorf is showing a marked slowdown in consumer with sales flat in Q1. Nevertheless, sell out numbers were higher than sell in figures, reflecting trade destocking. Nivea continued to outperform peers with a 30bp gain in market share (first two months). Nivea should continue to benefit from a price positioning which is more adapted to the current crisis. In addition, Beiersdorf exposure to the depressed prestige cosmetics business, through La Prairie, is relatively small. Consequently, we expect Beiersdorf to remain fairly resistant in the coming months. As to margins, they should come down by 200bp, due to higher marketing and R&D spending, while profitability in Asia will continue to be impacted by the Chinese acquisition (C-Bons). Visibility is even lower in the adhesives sector (sales down 23% in Q1) as a result of lower demand in the automotive and electrical sectors. Both sales and EBIT should collapse in 2009.
Consolidated results could fall by almost 24% in 2009.

The stock is down 24% YTD and 40% in a year. However, Beiersdorf remains expensive based on 2009 P/E of 19,6x. Our long term DCF based valuation (€35 per share) provides some floor. Although we are convinced that Beiersdorf will remain an attractive target for competitors looking for a global cosmetic brand., we feel that short term uncertainty should prevent the stock from rebounding.